Markets were hoping for clarity on rate hikes from the Fed on Wednesday, but instead we got more uncertainty—and that is the underlying reason why stocks (and bonds) dropped after Fed Chair Warsh’s press conference. As we and others noted, the market was ready to welcome a rate hike (or two) to help control inflation and yields, as long as that was not the start of a sustained rate hike campaign. And based on the Fed decision (a 25-bps rate hike) and the dots (which showed one more hike this year, but no more after that and a rate cut in 2027), that’s what investors believed they received—until Fed Chair Warsh’s press conference.
Without boring you with too many details, Warsh’s tone was more hawkish than the statement and dots for several reasons, including 1) Highlighting that inflation was too high on numerous fronts and that risks were tilted to the upside. 2) Noting that the economy appeared to be potentially strengthening (which means it can handle more rate hikes). 3) Noting that rates aren’t close to restrictive, and 4) Leaving extreme U.S. fiscal imbalances off of his list of reasons that Treasury yields are rising (implying he, like seemingly everyone in Washington, isn’t serious about the deteriorating U.S. fiscal situation).
Here’s why all of that matters. By the end of the day, Fed fund futures were pricing in more than one additional rate hike in 2026 (remember, the dots overwhelmingly showed just one additional hike) and one to two additional hikes in 2027 (the dots showed a rate cut next year). Put plainly, the market ended yesterday with a more hawkish view of the Fed than it started, thanks almost entirely to Warsh’s press conference.
More broadly, the clarity the market wanted on the Fed’s rate hike path (one or two and done) was ultimately not met, as the market is now pricing in two to four more rate hikes over the coming quarters. And perhaps worst of all, uncertainty lingers about how long and how far Fed rate hikes will go. The practical impact is that investors must confront broad uncertainty on numerous fronts: Geopolitical (how long will Middle East fighting continue and when will progress towards a regional ceasefire resume?), with AI (will calls to “slow” frontier models upend demand for infrastructure and slow spending in the economy?), and with the Fed (how many more times will the Fed hike rates and how long will it last?).
Markets will need more clarity on all three of these issues before we can believe this pullback will end. From a “what to do” standpoint, the positive news is that all the market needs is some clarity on these issues to resume the rally, because the underlying fundamentals remain strong (solid growth, AI capex spending, rising earnings). So, this is not a “reduce exposure” type of moment.
However, that does not mean the pullback is over (it likely isn’t). We’d expect what’s outperformed over the last month to continue to outperform. Some sectors have outright rallied or relatively outperformed, and until we get more clarity on the aforementioned issues, we should expect that to continue. This, along with the September and October historical negatives, means that meaningful rallies will probably come later in the year. As a result, we maintain our moderately conservative positioning in our accounts.
Source: Sevens Report 9-17-26