Fed Hikes Rates First Time Since 2023; Dow Drops 631

The Fed raised rates a quarter point to 3.75%-4% in Warsh's first move as chair, and his hawkish remarks sent the Dow down over 600 points.

The Federal Reserve on Wednesday voted unanimously, 12-0, to raise its benchmark rate by a quarter percentage point, lifting the target range from 3.50%-3.75% to 3.75%-4%. It was the central bank's first rate increase since July 2023 and came after the Fed held rates steady at its first five meetings this year. The FOMC said economic activity is expanding at a solid pace, productivity growth is strong, and capital investment is robust, but that inflation remains elevated and the move will support a timely return to the 2% goal.

The hike puts new chair Kevin Warsh, whom President Trump nominated expecting cuts, on a collision course with a White House demanding lower borrowing costs. Trump has repeatedly said the US should pay the lowest interest rate in the world, yet Warsh declared that 'the plain fact is that inflation is too high and has been for too long.' Pressed on the president's calls, Warsh declined to comment, saying the Fed 'stays in our lane' and that independence is a two-way street.

Markets had taken the widely expected hike in stride, but selling accelerated during Warsh's press conference as he repeatedly stressed that inflation risk was not improving, saying this summer's readings do not show underlying trends have meaningfully improved. CNBC reports the Dow lost 631.21 points, or 1.21%, to finish at 51,461.90, with the S&P 500 down 0.45% to 7,551.81 and the Nasdaq down 0.01%. Bank of America, Wells Fargo, American Express and Goldman Sachs shares each fell roughly 3-4% on fears a sustained tightening cycle could slow lending.

The 10-year Treasury yield moved back above 5% after Warsh spoke, a level CNBC describes as a massive psychological threshold, and the Fed-sensitive 2-year yield spiked 6 basis points to 4.72%. Business Insider reports the Fed's updated projections point to one more hike before year-end, while odds of 50 basis points of total tightening by December rose to 38% from 10% a week earlier per CME FedWatch. The dollar index popped 0.6% to 100.21, its highest since July 31.

The White House swiftly criticized the move: Newsweek reports presidential special assistant Kush Desai called it an 'unfortunate decision,' arguing inflation is driven by an energy supply shock from the Middle East that higher rates cannot fix. Democrats including Senator Elizabeth Warren blamed the president for higher mortgage and credit card costs. Citi strategists noted equities tend to wobble around the start of hiking cycles but climb six and twelve months later, while Ed Yardeni cut his year-end S&P 500 target to 7,900 from 8,400 citing rising yields, according to CNBC.

The FOMC meets next on October 25-26, where CME FedWatch shows near-even odds between holding and another quarter-point hike, followed by a December 8-9 meeting where markets lean toward a further increase to a 4.25%-4.5% range. Warsh said he is 'not in the forward guidance business' and would not prejudge future decisions. Goldman Sachs Asset Management's Kay Haigh expects a December hike as the base case, contingent on upcoming CPI reports and energy prices, with oil holding above $100 and diesel hitting $6 a gallon amid supply strains from the Ukraine and Iran wars.