Kevin Warsh’s inaugural meeting as chairman of the US Federal Reserve sent shivers through Wall Street, despite initial expectations his tenure would usher in lower interest rates. The S&P 500 index closed down 1.2 per cent on Wednesday night, marking the most significant market slump for a new Fed chair’s first rates decision since 1994. Even SpaceX, a seemingly robust public company, experienced a 5 per cent decline after a strong initial market performance.
While the Federal Reserve kept interest rates steady between 3.5 per cent and 3.75 per cent, Warsh’s post-meeting commentary and new projections signalled a firm commitment to battling inflation. Warsh, known for his aversion to explicit forward guidance, made it clear the Fed would no longer signal near-term rate directions. However, he emphatically stated, “The committee will deliver price stability.” This resolve, coupled with nine of 18 officials now expecting higher rates by year-end – a stark contrast to zero in March – led investors to anticipate potential rate increases.
The market quickly interpreted Warsh’s strong stance on inflation and revised dot plot projections as a signal the Fed is prepared to lift rates, possibly twice, this year – a significant reversal from earlier expectations of two rate cuts. This triggered a surge in Treasury yields; the US two-year rate climbed 0.17 percentage points to 4.22 per cent, its highest since February 2025, with the 10-year yield nearing 4.5 per cent. This underscores the Fed’s predicament in a “higher-for-longer” world, where protracted above-target inflation jeopardises its credibility and risks unanchoring expectations. In a related development, private equity firm Thoma Bravo incurred a $7 billion loss by handing software firm Medallia back to lenders. Medallia, which provides customer experience management solutions, struggled with excessive debt amidst AI disruption, serving as a stark reminder of current financial pressures.
