US stock markets dropped sharply on Wednesday afternoon after the Federal Reserve left interest rates unchanged and signaled a possible rate hike before the end of the year. The Dow closed 500 points lower, and the S&P 500 and Nasdaq each fell more than 1.2% soon after the announcement.
The Fed held its benchmark rate at a range of 3.5% to 3.75%, where it has remained since December, in a decision unanimously supported by its voting committee. The move came during Kevin Warsh's first meeting in charge of the central bank, after he replaced Jerome Powell in May.
“US stocks tumbled after the Fed held rates and nine of 18 officials signalled a possible hike this year.”
Uncertainty over Donald Trump's deal to end the war with Iran contributed to the cautious stance, with inflation running at an above-target 3.8%. "Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East," the Federal Open Market Committee said in a statement.
The committee's projections, released alongside the decision, revealed a sharp pivot from earlier expectations. Nine of the 18 central bankers who participated in the rate-setting process predicted an interest rate hike this year, while eight expected rates to stay the same and just one foresaw a cut. In March, 12 of 19 officials had projected at least one rate cut by the end of this year.
Samuel Tombs, chief US economist at Pantheon Macroeconomics, said the "big news" from Wednesday was the dot-plot pointing to potential interest rate hikes before the end of the year.
Trump, who had pressed Powell to cut rates and made clear he expected the same from Warsh, reacted with resignation. Asked about the decision, Trump said, "It's alright… whatever." When told about possible rate hikes, he said, "It could happen… it's hard to believe. It just keeps the country down, it is so unusual." But he praised Warsh, saying, "We have a very good guy over there now, so I'm guided by what he wanted."
Warsh, a sharp critic of the Fed's past communication style, delivered a markedly shorter statement. The April version was almost 350 words; Wednesday's update was just 132. It also removed a previous hint that the Fed was leaning towards future rate cuts. "The Committee will deliver price stability," the statement concluded.
In his first press conference as chair, Warsh announced plans to overhaul the central bank, creating five new taskforces to assess monetary policy, including communications, the Fed's balance sheet, data, productivity and jobs. "I don't want to prejudge the outcomes but I'm open-minded about what they could be," he said.
Warsh did not contribute his own projection to the dot-plot, which he opposes, but said he encouraged colleagues to proceed with it. The question now is whether the Fed's hawkish tilt will persist – or whether Trump's backing of his new chair will shift the course.