Wall Street left Wednesday’s Federal Reserve meeting broadly convinced that a rate hike is coming, with September now firmly in focus for investors.
The Fed held interest rates steady at the second meeting chaired by Chairman Kevin Warsh, but the decision was far from unanimous, rattling financial markets.
Three policymakers dissented in favour of raising rates immediately, marking the highest number of members pushing for an increase since September 2016, according to Ian Lygen, head of U.S. rates strategy at BMO Capital Markets.
Back in 2016, the Fed kept rates unchanged at its next meeting in November before unanimously voting for a 25-basis-point increase in December of that same year.
“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 now suggest more than a 57% likelihood of a quarter-point increase at the September meeting, according to CME’s FedWatch tool, while about 53% of Kalshi traders predict the Fed will hike.
“For now, it’s likely that market pricing for a hike has simply been pushed forward,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. “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 be a cut in March next year.
Warsh reinforced the central bank’s commitment to returning inflation to its preferred annual rate of 2%, stating bluntly: “You’ve heard this before, but we will deliver price stability.”
DoubleLine Capital CEO Jeffrey Gundlach pushed that argument further, warning on CNBC’s “Closing Bell” that hitting the inflation target will require tighter monetary conditions.
“If you really want to get to 2%, I think you have to raise interest rates,” Gundlach said Wednesday.
The S&P 500 (SPX) tumbled 1.5% on Wednesday, 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 hammered markets in April 2025.
The Nasdaq Composite slid more than 10% off its all-time high, also recording its sixth consecutive losing session, a streak not seen since 2024.
“Financial markets are still wrestling with the shift in Fed leadership,” said Josh Jamner, senior investment strategy analyst at ClearBridge Investments, describing increased price volatility under Warsh as “more of a feature than a bug.”
The 30-year Treasury yield climbed more than 10 basis points on Wednesday to reach its highest level since July 2007, while the benchmark 10-year yield rose above the key 4.6% level.
Gundlach said these bond market moves are sending the Fed a direct message about what investors expect from policymakers trying to credibly fight inflation.
“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.'”