These 2 Words From Fed Chair Kevin Warsh Sunk the Dow, S&P 500, and Nasdaq, and Put Wall Street on Notice

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Today, Sept. 16, is the day Wall Street professionals and retail investors have had circled on their calendar for weeks: Federal Open Market Committee (FOMC) decision day on interest rates.

Leading up to the September FOMC meeting, prediction markets all but assured investors that an interest rate hike was expected. The questions to be answered were:

  • How would the Dow Jones Industrial Average (^DJI -1.21%), S&P 500 (^GSPC -0.45%), and Nasdaq Composite (^IXIC -0.01%) react?
  • Would Fed Chair Kevin Warsh come off as dovish or hawkish?
Kevin Warsh is delivering remarks to the press following the September Federal Open Market Committee Meeting.

Fed Chair Kevin Warsh just shook Wall Street with two words. Image source: Official Federal Reserve Photo.

As expected, Warsh and his colleagues voted in favor of a 25-basis-point increase to the federal funds target rate (now 3.75%-4.00%), with all 12 of the FOMC’s voting members in favor of the move.

But the reaction on Wall Street was less than stellar. Even though the Dow, S&P 500, and Nasdaq Composite bounced off their intra-day lows over the final 40 minutes of trading, all three indexes closed out the session in the red, with the Dow’s 631-point loss leading the way.

The culprit for the stock market’s angst can be traced to two words uttered by Fed Chair Warsh.

Kevin Warsh just put Wall Street and investors on notice

In Warsh’s prepared remarks to the press, he highlighted a strengthening American economy, noted that job growth and the unemployment rate have been favorable, and claimed he’d be “hard-pressed to describe broad financial conditions as restrictive.”

However, his comments on inflation point to a battle that’s just getting started:

But inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s two 2% goal. This Committee will deliver price stability.

In particular, it’s Warsh’s use of “timelier return” that’s echoing through Wall Street and dragging the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite lower.

During the Fed chair’s speech in Jackson Hole on Aug. 28, he summed up his thoughts by stating:

We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.

Three weeks ago, he drew a line in the proverbial sand that effectively said a decline in prices isn’t good enough to satiate the central bank. Inflation would have to retreat in a timely manner (i.e., at sufficient speed), in his and the FOMC’s eyes, to avoid action. Warsh’s use of “timelier return” in his opening remarks to the press signals that while headline inflation has eased since May, it’s not falling quickly enough and has been persistently above the FOMC’s 2% target for more than five years.

It also sets the stage for a series of rate hikes. The latest Summary of Economic Projections (commonly known as the dot plot) calls for a 50-basis-point increase in the federal funds target rate before years’ end (we got 25 today) and a delayed return to 2% core inflation until 2029.

In other words, Wall Street and investors have been put on notice that the Fed appears willing to stomp the brakes on economic growth to deliver price stability. If the cost to finance the artificial intelligence (AI) data center build-out climbs and growth rates are adjusted lower, even marginally, it could spell the end to Wall Street’s four-year, AI-driven bull market.

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