US stocks experienced a volatile Wednesday, initially posting modest gains before plummeting following the Federal Reserve's release of projections indicating that nine of 18 policymakers anticipate at least one interest rate hike this year. This led to a 1.2% drop in the S&P 500, erasing an earlier gain. The Dow Jones Industrial Average, which had been up $280 points in the morning, closed down by $507 points, or 1%, while the Nasdaq composite fell 1.3%. Traders increased their bets on a rate hike, with an 84% probability now expected this year, up from 59.5% a day earlier.
Simultaneously, a tentative US-Iran peace deal began to influence market sentiment. This agreement, expected to be signed Friday in Switzerland, aims to reopen the Strait of Hormuz, easing global oil flow and potentially mitigating inflation. Oil prices, particularly Brent crude, were steadier on Wednesday after earlier declines, with futures falling 0.8% to $78.35 per barrel, pushing prices below $80 for the first time since March. The deal also includes provisions for lifting the US naval blockade, waiving Iranian oil and petrochemical export sanctions, unlocking frozen Iranian assets, and launching a $300 billion regional reconstruction initiative.
Federal Reserve Chair Kevin Warsh, in his first press conference, stated he did not forecast the federal funds rate for 2026 and expressed a desire to revamp the Fed's communication strategies. He aims for Wall Street to react to economic data based on its impact on investments rather than expectations of Fed actions. Despite Warsh's caution that he "didn't hear tons of conviction" behind the policymakers' projections, the bond market reacted, with the 10-year Treasury yield rising to 4.49% from 4.43% and the two-year Treasury yield jumping to 4.21% from 4.05%. The Fed maintained the federal funds rate at its current level at this meeting.
