Wall Street emerged from Wednesday’s Federal Reserve decision increasingly convinced that a rate hike is coming, likely as soon as September.
The Fed held interest rates steady at the second meeting led by Chairman Kevin Warsh, but the decision carried a distinctly hawkish tone that rattled investors across asset classes.
Three policymakers broke from the committee’s hold decision to push for an immediate rate increase, marking the highest number of members demanding a hike since September 2016.
Ian Lygen, head of U.S. rates strategy at BMO Capital Markets, noted that in 2016, the Fed held rates at its next meeting before unanimously voting on a 25-basis-point increase in December.
“We’re reading this as a Committee with vocal hawks but the majority is siding with Warsh,” Lygen wrote to clients on Wednesday.
Fed funds futures trading now suggests more than a 57% likelihood of a quarter-point increase at the September meeting, according to CME’s FedWatch tool.
About 53% of Kalshi traders predict the Fed will hike rates at its next move, compared with 43% betting on another hold.
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said the path forward remains uncertain but active. “For now, it’s likely that market pricing for a hike has simply been pushed forward,” Zentner said. “September remains a live meeting.”
Stephen Douglass, chief economist at NISA Investment Advisors, said the three dissenters could signal the Fed landed on a “hawkish hold,” though he still expects the Fed’s next move to ultimately be a cut in March of next year.
Warsh reinforced the central bank’s commitment to taming inflation during his Wednesday press conference, keeping his message direct and firm. “You’ve heard this before, but we will deliver price stability,” Warsh said.
DoubleLine Capital CEO Jeffrey Gundlach was more blunt about what achieving that 2% inflation target will require. “If you really want to get to 2%, I think you have to raise interest rates,” Gundlach said Wednesday on CNBC’s “Closing Bell.”
The S&P 500 (SPX) tumbled 1.5% in Wednesday’s session, marking the worst second “Fed day” for a new chief in recent history, according to Bespoke Investment Group.
The Dow Jones Industrial Average (.DJI) dropped more than 2% on Wednesday, its largest single-day decline since President Donald Trump’s tariff policy rattled markets in April 2025.
The Nasdaq Composite slid more than 10% off its all-time high and notched its sixth straight losing session, a streak not seen since 2024.
Josh Jamner, senior investment strategy analyst at ClearBridge Investments, said markets are still adjusting to the new Fed leadership dynamic. “Financial markets are still wrestling with the shift in Fed leadership,” Jamner said, describing increased price volatility under a Warsh-led Fed as “more of a feature than a bug.”
The 30-year Treasury yield climbed more than 10 basis points on Wednesday, reaching its highest level since July 2007 and signaling deep investor concern about inflation.
The benchmark 10-year Treasury yield rose above the key 4.6% level, while shorter-dated yields pulled back as traders judged the Fed willing to wait before acting.
Gundlach argued that the bond market’s reaction was itself a message directed squarely at the Federal Reserve. “The long bond yield went up significantly after the press conference,” Gundlach said. “The bond market vigilantes are saying, ‘If you really want us to believe your rhetoric, you’ve got to start acting.'”
