Fed leaves interest rates unchanged but signals higher rates are ahead

Stocks, short-term bonds and gold all fell after the Federal Reserve held interest rates steady and nine Fed members indicated a rate hike by year-end is warranted.

The Dow fell 507 points, or 0.98%. The S&P 500 fell 1.21%, and the tech-heavy Nasdaq Composite fell 1.34%. Stocks fluctuated during Fed Chairman Kevin Warsh’s remarks before extending losses in the final hour of trading.

Two-year Treasury yields jumped a whopping 16 basis points to 4.21%, hitting their highest level in over a year. Yields rise when bond prices fall.

The US dollar index rose about 1% and was set for its best day in almost a year, reflecting expectations for higher-for-longer rates. Gold, which tends to do worse when rates are higher and the dollar is stronger, fell more than 2%.

The Fed published a truncated statement, which mentioned that inflation remains “elevated” partly because of energy “supply shocks.”

Warsh opted not to submit a forecast for the central bank’s so-called dot plot. But nine members of the Fed signaled a rate hike is needed by year-end, according to their projections.

Traders are now pricing in a 49% chance of a rate hike in September, up from a 27% chance yesterday, according to CME FedWatch.

“Markets were holding out hope that Chair Warsh would throw them some kernels of real dovishness that they obviously felt they didn’t get,” Kristina Hooper, chief market strategist at Man Group, told CNN.