US stocks, including the Dow, S&P 500, and Nasdaq, experienced significant declines following a hawkish outlook from the Federal Reserve, despite the central bank holding interest rates unchanged. The Dow fell by $0.98%, with the S&P 500 and Nasdaq dropping $1.2% and $1.3% respectively. This market reaction was driven by Federal Reserve Chair Kevin Warsh's first press conference, where interest-rate forecasts were revised upwards for the next three years. Nine of the Fed's 18 policymakers now expect at least one rate hike before the end of 2026, a stark contrast to March when no participants anticipated a hike.
Warsh emphasized the Committee's "unambiguously and unanimously" commitment to bringing inflation back to the Fed's $2% target, which markets interpreted as a signal that the Fed is prepared to raise rates if necessary. Market commentator Stephen Innes noted that this was a "hawkish hold," making rate hikes "believable again" and lowering the bar for a hike while raising it for a cut. This stance led to a jump in bond yields, with the two-year US Treasury note climbing $12.7 basis points to $4.195% and 10-year bond yields rising $5.5 basis points to $4.500%.
The hawkish Fed outlook also spurred a broader sell-off in global stocks and bonds, with the FTSE All-World index shedding up to $1.7% and the S&P 500 and Nasdaq Composite each falling $0.8%. This was compounded by robust US jobs data, which fueled expectations of further Fed rate rises. Minutes from the Fed's June meeting indicated that "almost all" participating officials believed additional interest rate increases would be "appropriate" due to "unacceptably high" inflation. The Vix volatility index, a "Wall Street's fear gauge," briefly jumped above $17, reflecting investor concerns over prolonged high borrowing costs.
Economically, updated Fed projections show a revised downward outlook for real GDP growth to $2.2% by the end of 2026 from $2.4%, and a sharp increase in PCE inflation estimates from $2.7% to $3.6%. Core PCE also rose from $2.7% to $3.3%. Despite these concerns, the unemployment rate improved, revised down from $4.4% to $4.3%. US retail sales rose $0.9% in May to $763.7 billion, a $6.9% increase annually, and pending home sales jumped $3.8%. A sharp $8.26 million-barrel draw in crude oil inventories also highlighted strong demand and ongoing inflation risks.
