US sharemarkets fell on Wednesday after the Federal Reserve delivered a more hawkish-than-expected outlook, prompting investors to reassess the path of interest rates under new Fed Chair Kevin Warsh.
The Dow Jones Industrial Average dropped 507.12 points, or 0.98%, after earlier reaching a record intraday high. The S&P 500 fell 1.21%, while the Nasdaq Composite declined 1.34%.
The Federal Reserve left the federal funds rate unchanged at a range of 3.5% to 3.75%, as widely expected. However, policymakers revised their interest rate projections higher, with the median year-end forecast for 2026 rising to 3.8% from 3.4% in March.
The updated “dot plot” showed that several Fed officials now expect interest rates to increase next year, signalling that inflation remains a concern despite recent moderation in price pressures.
Markets weakened after the release of the projections, with investors interpreting the revised outlook as a sign that monetary policy could remain restrictive for longer than previously anticipated.
Kevin Warsh’s first meeting as Fed Chair also drew attention after he chose not to submit an interest rate forecast, adding another layer of uncertainty for investors seeking guidance on the policy outlook.
Technology stocks were among the weaker performers, contributing to broader market losses as investors reacted to rising bond yields and the prospect of tighter financial conditions.
Bond yields moved sharply higher following the Federal Reserve’s updated interest rate projections. The two-year US Treasury yield climbed to around 4.22%, reflecting growing expectations that policymakers may need to tighten policy further if inflation remains elevated. Money markets are now fully pricing in a US rate increase by October, marking a significant shift in expectations following the Fed meeting. The US dollar strengthened after the announcement, while the Australian dollar fell 0.7% to around US70¢.
Investors also continued monitoring developments surrounding the interim agreement between the United States and Iran, with attention turning to whether easing geopolitical tensions and lower oil prices will help reduce inflation pressures in coming months.
Eurozone government bonds extended their rally for a fifth consecutive session as investors assessed the global interest rate outlook.
Australian Market Outlook
Australian shares are expected to open lower after the Federal Reserve’s hawkish outlook triggered a broad sell-off across Wall Street and pushed bond yields higher. S&P/ASX 200 futures are down 61 points, or 0.7%, to 8,892. The prospect of higher US interest rates is likely to weigh on sentiment locally, particularly across growth sectors sensitive to borrowing costs and bond yields. Markets will also continue assessing the implications of the Reserve Bank of Australia’s decision to leave rates unchanged, with investors increasingly focused on the divergence between Australian and US monetary policy expectations.
Later today, investors will be watching US economic data including weekly jobless claims, May leading indicators and the Philadelphia Fed Index for further clues on the strength of the economy and the outlook for interest rates.
