Fed signals another hike after raising rates 25 basis points; Dow falls 1.2%

The quarter-point step was the decision markets had already treated as likely. What sold stocks into the close was Chair Kevin Warsh's refusal to treat it as finished. "The plain fact is that inflation is too high and has been for too long," he said. In the Summary of Economic Projections, 12 participants put the year-end 2026 funds-rate midpoint at 4.125% and four put it at 4.375%. Only 2 left it at 3.875%, the midpoint of the range just set.

By the 4 p.m. ET close, the S&P 500 was at 7,553, down 32 points, or 0.4%. The Dow Jones Industrial Average fell 631 points, or 1.2%, to 51,462. The Nasdaq Composite was unchanged. An equal-weight S&P 500 fund BRSP dropped 0.8%, against 0.4% for the cap-weighted index.

Warsh points to another increase

The Federal Open Market Committee voted unanimously to lift the funds-rate target by a quarter point to 3.75%-4.00%, effective Thursday. It was the first increase since 2023. The statement was blunt for a central bank: inflation "remains elevated," and "today's policy action will support a timelier return to the Committee's 2 percent goal."

Warsh, at his 2:30 p.m. ET press conference, went further. "Our predominant focus is on the price-stability side of our mandate," he said. He later added, "Today's action starts to show we're serious about this." The decision, he said, came "at a time when the American economy appears to be strengthening."

The median funds-rate projection is 4.1% for the end of 2026, up from 3.8% in June, and 4.1% again for the end of 2027, up from 3.6%. That median sits above the new target range. Jeff Gundlach told CNBC the Committee should have raised by half a percentage point rather than a quarter: "I would have called that stun and done." Neil Dutta of Renaissance Macro Economic Research said he expects more than one increase from here.

The morning data did not argue for patience. August retail sales rose 1.2%, and nonfuel import prices were up 5.5% from a year earlier, the most since May 2022.

U.S. stocks spent the morning higher, held those gains through the 2 p.m. statement, then gave them up as Warsh spoke. The 10-year Treasury yield, which had dipped after the decision, was back at 5.01% on the official curve by the close.

A broad equity decline, concentrated in the Dow

The S&P 500 fund ASPY fell 0.4% and traded its heaviest volume in 20 sessions, extending a three-session decline. The eight largest contributions netted to almost nothing. Microsoft, Exxon Mobil, Amazon, and Alphabet led the detractors. Nvidia, Intel, and Apple offset some of that.

The Nasdaq-100 fund AQQQ closed little changed, up less than 0.1%, as Intel, Nvidia, and Advanced Micro Devices offset declines in Microsoft and Amazon. The Dow fund ADIA dropped 1.2% on its heaviest volume in 20 sessions. The Russell 2000 fund AIWM fell 0.4%, also a third straight decline, and is down 6.4% over one month.

Technology AXLK and health care each gained 0.1%. Energy AXLE fell 2.8%, the worst of the 11 SPDR sector funds, on its heaviest volume in 20 sessions. Financials AXLF dropped 1.6%, its largest one-day decline in 30 sessions, also on 20-session-high volume.

The Dow's damage was mechanical and concentrated. It is price-weighted, and Goldman Sachs is the largest holding in ADIA at 11.1%. Goldman fell 4.0% after Chief Executive David Solomon said the firm's fixed-income, currencies, and commodities business would be slightly softer in the third quarter. That single position subtracted 0.44 percentage points from the Dow fund. American Express fell 3.7%, IBM 4.4%, and Boeing 3.7%. Those four names together took 0.79 percentage points off ADIA. Boeing Chief Executive Kelly Ortberg said stabilizing 737 MAX production at 47 jets a month is taking longer than expected, with wings the constraint at the Renton, Washington, factory.

Crude stayed above $100

West Texas Intermediate was at $102.12 a barrel as of 4:27 p.m. ET, down 3.5%. Brent was at $105.54, down 3.0%. The oil fund BUSO fell 3.5%. WTI closed Tuesday near $106 after Saudi Arabia's East-West pipeline was shut by attacks.

The energy sector move was a producers' decline. Exxon Mobil, 20.3% of AXLE, fell 3.5% and subtracted 0.72 percentage points from the sector fund. Chevron dropped 2.9% and ConocoPhillips 6.1%. Refiners went the other way: Valero rose 1.6% and Marathon Petroleum 0.8%. Cheaper crude on the day is a cost relief for a refiner and a revenue cut for a producer; the sector fund is built more like the second.

J.B. Hunt fell 13.3% after warning that third-quarter earnings would drop 5% to 10% from the second quarter and citing at least $10 million of extra diesel costs. Industrials AXLI still closed only 0.1% lower.

The two-year yield rose; the 10-year held 5%

The 10-year yield finished at 5.01%, 1 basis point higher on the day and a basis point from its 52-week high. The 2-year yield rose 7 basis points to 4.74% from 4.67%, and the spread between the two narrowed 6 basis points to 0.27 percentage points. The 30-year yield was 5.35%. Long Treasurys BTLT rose 0.2% on their heaviest volume in 20 sessions. Investment-grade credit ALQD gained 0.2% and high-yield BHYG 0.1%.

The U.S. Dollar Index rose 0.5% to 100.08. The dollar-bullish fund CUUP gained 0.6%, its fifth straight advance and its heaviest volume in 20 sessions. Gold BGLD fell 0.6%. The CBOE Volatility Index rose 3.0% to 17.72.

The next increase is the path 16 of 18 officials wrote down. That hike stays off the calendar if inflation between now and year-end cools enough that those dots look wrong.