[New York = E-Daily Seong Joowon Correspondent] “We have removed some of the accommodation.”
On the 16th (local time), it was not so much the U.S. Federal Reserve’s (Fed) first interest rate hike in over three years that shook New York’s financial markets, but rather this single remark by Fed Chairman Kevin Warsh. Although the market-anticipated 0.25 percentage point hike materialized, the tone shifted when Chairman Warsh assessed that current financial conditions could hardly be considered tight. This is because if even the current interest rate level is not considered sufficiently restrictive, it could become difficult to gauge just how high the Fed will raise rates.

Wall Street’s focus is now rapidly shifting from “Will the Fed raise rates further?” to “How many more times will it raise them?” With the strong U.S. economy giving the Fed the leeway to handle additional hikes, coupled with the energy shock stemming from the Middle East, concerns are growing that high interest rates may persist longer than expected.

Expected 0.25 percentage point hike… Sentiment shifts as Warsh speaks

On that day, the Dow Jones Industrial Average closed at 51,461.90, down 1.21%, on the New York Stock Exchange. The S&P 500 index fell 0.45% to 7,551.81. The Nasdaq Composite Index was virtually flat, down 0.01% to 25,978.42. All three major indices rose at one point during the session but gave up their gains following the Fed’s rate decision and Wash’s press conference.
The Fed raised its benchmark interest rate by 0.25 percentage points from 3.50–3.75% to 3.75–4.00%. Although this was the first rate hike in three years and two months since July 2023, it did not come as a major shock to the market. This is because the likelihood of a hike had already been priced in at over 90%.
Instead, strong consumer spending supported the stock market in early trading. August retail sales, released that day, rose 1.2% from the previous month, significantly exceeding the market forecast of 0.8%. Oil prices also fell as concerns over supply disruptions eased somewhat. West Texas Intermediate (WTI) crude fell more than 3%, and Brent crude also dropped 2.7%. As the burden of energy prices—which had been weighing on the stock market—eased somewhat, the three major indices trended higher until the announcement of the Federal Open Market Committee (FOMC) results. Reuters reported that while international oil prices had risen by more than 20% over the past two and a half weeks, reports that Saudi Arabia would provide additional crude oil supplies via Oman helped alleviate supply concerns.
The mood shifted starting with Chair Wash’s press conference at 2:30 p.m. Wash stated, “The clear fact is that inflation has been too high for too long,” adding, “This summer’s inflation data does not show a meaningful improvement in the underlying trend.”
The market was particularly sensitive to Wash’s assessment of current financial conditions. He noted that it was difficult to describe broad financial conditions as tight and explained that this rate hike was “a removal of some of the easing.”
Krishna Guha, Vice Chairman of Evercore, analyzed that Wash’s press conference was “consistently hawkish,” noting that this characterization in particular unsettled both his firm and the bond market. He pointed out, “These remarks risk clouding our judgment regarding how high the Fed Chair believes interest rates need to go.”
The market’s concern was not the 0.25 percentage point hike itself, but Wash’s perception that current financial conditions are not sufficiently tight—suggesting that this hike might mark the beginning of further increases rather than the end of the tightening cycle.

10-Year Yield Back Above 5%… Caution Over “Higher Rates for Longer”

The bond market also reacted sharply. The yield on the 10-year U.S. Treasury note, which had fallen to 4.

95%

just before the Fed’s decision, rose back above 5% following Wash’s press conference, closing the day at 5.003%. According to The Wall Street Journal (WSJ), this marks the first time in 19 years that the 10-year yield has closed above 5%. The 2-year yield, which is sensitive to monetary policy, rose 7 basis points (1 bp = 0.01 percentage point) to 4.74%. The dollar also strengthened.
Art Hogan, chief market strategist at B. Riley Wealth, noted that the market is focusing on the 10-year yield’s return above 5%, describing 5% as a “huge psychological level.” He assessed that the yield curve’s reaction, along with concerns that inflation and high interest rates could persist longer than expected, could all act as headwinds for the stock market in the short term.
Financial stocks were particularly sensitive to rising interest rates. Bank of America and Wells Fargo each fell nearly 3%, while American Express and Goldman Sachs also dropped nearly 4%. The SPDR S&P Bank ETF (KBE), an ETF tracking bank stocks, fell 2.6%, marking its worst day since last February. Concerns grew in the market that further interest rate hikes could weigh on loan growth and the economy.
In contrast, tech stocks held up relatively well. Intel, in particular, jumped 4% on reports that it is discussing memory chip production in the U.S. with SK hynix(000660), helping to limit the Nasdaq’s decline.
“It’s

unlikely to end with just one hike”… 50% probability of another hike in October

The dot plot released by the Fed that day also heightened market caution. Of the 18 FOMC members who submitted forecasts, 16 believed at least one additional rate hike this year would be appropriate. Among them, four anticipated two additional hikes. The median forecast for the benchmark interest rate at the end of this year stood at 4.1%, a significant increase from 3.8% in June. The forecast for the end of next year is also 4.1%.
According to Bloomberg, the interest rate market is pricing in a roughly 50% probability of an additional rate hike this October. The fact that 2-year yields have jumped to their highest level since 2024 and the dollar has strengthened also indicates that expectations for further tightening are being recalibrated.
Shima Shah, Chief Global Strategist at Principal Asset Management, assessed, “The debate has now shifted from whether rates will rise again to how many more hikes remain.” Commenting on the unanimous decision, she noted that rising energy prices and persistent inflation had swayed even the dovish members, adding, “It is highly unlikely that this will be a one-and-done move.”
Stephen Brown, an economist at Capital Economics, said it is highly likely that at least one more hike will follow this one this year, predicting an additional hike in December. He maintained his previous forecast of one more hike in 2027, arguing that the Fed is underestimating the potential for a decline in the unemployment rate.
A strong economy also serves as a factor supporting further Fed rate hikes. Jason Fried, Head of Investment Strategy and Research at Glenmede, analyzed that because the labor market is holding up robustly overall, the Fed now has room to combat inflation through interest rate hikes. This is precisely the point that Wall Street is wary of. While a strong economy is positive for corporate earnings, it also gives the Fed the “leeway” to pursue further tightening. If energy-driven inflationary pressures persist—with international oil prices exceeding $100 per barrel—the Fed’s rate-hiking cycle could extend longer than the market had anticipated just a few months ago.
Andrei Skiba of RBC Global Asset Management assessed that market expectations for limited additional rate hikes have weakened as the Fed has made clear its commitment to tackling inflation. However, he noted that once the initial market readjustment is complete, Wash’s clear messaging could actually support long-term Treasury prices.
The next key point to watch is ultimately “how much the U.S. economy and stock market can withstand long-term interest rates in the 5% range and further rate hikes.” The Dow’s drop of more than 600 points today showed that Wall Street is reacting more sensitively to potential further tightening that could follow a 0.25 percentage point rate hike.