Major U.S. indices closed lower following the Fed's rate hike. What spooked the market?

Major U.S. stock indices fell at the close of trading on September 16—after the Fed raised interest rates for the first time in three years, and the median forecast indicated expectations of further tightening this year. The fact that this tightening is unlikely to be a one-off event put pressure on stocks and led to a rise in yields on two-year Treasury bonds, MarketWatch explains.

The Dow Jones Industrial Average, a "blue-chip" index, was hit the hardest—it plummeted 1.2%. By comparison, in the past, following the Fed’s first rate hike, it lost an average of 0.5% over the course of a week, according to Dow Jones Market Data cited by MarketWatch.

The S&P 500 broad-market index fell 0.5%, while the tech-heavy Nasdaq Composite lost a negligible 0.01%. The Russell 2000 index of small- and mid-cap companies declined 0.4%.

Short-term U.S. Treasury bonds underperformed those with longer maturities: the yield on two-year bonds reached its highest level since 2024. The dollar strengthened.

According to Bloomberg, the main source of volatility was not the regulator’s decision itself—which was in line with market expectations—but rather the press conference held by Federal Reserve Chair Kevin Warsh following the meeting. Although Warsh declined to provide guidance on the Fed’s next steps, his remarks reinforced the signal that the agency described as “hawkish.”

When asked about the factors that influenced the decision, the Fed chair cited steady economic growth, inflation trends that “did not meet the necessary criteria,” and the geopolitical situation. At the same time, Warsh acknowledged: “We cannot influence the price of any single commodity—be it oil or groceries. But what we can and will do is ensure that this does not lead to broader price increases.”

Traders now estimate the probability of another rate hike at the next Fed meeting in October to be more than 50%, up from 43% the day before, according to the FedWatch market sentiment tracking tool.

"In both the statement and the updated forecast, the regulator emphasized that inflation remains the main problem and that today's decision should hardly be viewed as a one-time measure. The decision was unanimous—in other words, there were not even a few “no” votes from proponents of a more accommodative policy. “The committee demonstrated far greater unity than the market had anticipated,” notes Daniel Siluk, head of global short-term bonds and liquidity at Janus Henderson Investors.

“Rising energy prices and persistent inflation have convinced even the ‘doves,’” said Sima Sha of Principal Asset Management. She, too, believes the rate hike will not be a one-off. In her view, the markets have already priced in several rounds of tightening, and the Fed will likely have to raise rates at least one more time to maintain confidence in itself.

Today's rate hike this year will likely be followed by at least one more, most likely in December, according to Stephen Brown of Capital Economics. "We believe Fed officials are underestimating the potential for the unemployment rate to fall, so we maintain our expectation of a third hike—in 2027," he warned.

The Fed’s rate hike was initially more about restoring confidence in the regulator than an attempt to influence oil prices through a 25-basis-point increase, according to Vincent An, president and portfolio manager at SLW Investments. The decision sent a positive signal for long-term Treasury yields, but a single rate hike “won’t open the oil floodgates,” he noted. “The war [with Iran] and the [oil] supply shock haven’t gone away. So the main question is: what happens next?” the financier warned.

This article was AI-translated and verified by a human editor