Wall Street slams Fed Chair Warsh after interest-rate hold

The S&P 500 dropped 1.52% on Friday after the Federal Reserve left its benchmark rate unchanged at 3.5%, even though the personal consumption expenditures price index remains above the Fed’s 2% target. Traders interpreted the decision as a signal that a rate hike could be forthcoming in September, prompting a sell-off in equities.

The Nasdaq 100 has slipped more than 10% over the past month, entering correction territory, and the CME FedWatch index shows 65% of futures traders now expect a rate increase at the next meeting.

During the post-meeting press conference, reporters repeatedly asked Chair Kevin Warsh why the Fed was not acting more aggressively against five years of elevated inflation. Warsh replied that rates had risen compared with 42 days earlier and that the Fed was stepping back from trying to influence longer-dated bond yields. The 30-year Treasury yield rose to 5.23%, its highest level in 19 years.

Analysts described the communication as a credibility shock. > "Warsh didn’t convey the message clearly or explicitly, and the bond market puked on him," said Jon Hilsenrath of Serpa Pinto Advisory. > "This is a classic central-bank credibility shock," added Mark Cabana, head of U.S. rates strategy at Bank of America. > "The biggest failure of the press conference was that Warsh didn’t explain why they didn’t hike," noted Robert Sockin, chief U.S. economist at PGIM.

The market reaction was compounded by geopolitical tension after U.S. forces launched strikes against Iran, pushing Brent crude above $90 a barrel. European indices rose modestly, while Asian markets showed mixed performance.

Overall, investors appear concerned that the Fed’s stance may undermine its inflation-fighting credibility, while the prospect of a September hike adds uncertainty to equity valuations.