Dow falls 500 points as Fed's hawkish shift jolts markets

US stocks fell sharply on Wednesday, with the Dow Jones Industrial Average shedding nearly 500 points, after the Federal Reserve left interest rates unchanged but signaled that policymakers may still need to raise borrowing costs to contain inflation.

The Dow closed down 507 points, or 0.98%, at 51,492.55. The S&P 500 lost 1.21% to end at 7,420.10, while the Nasdaq Composite declined 1.34% to 26,021.66.

The declines came after the Federal Reserve's first policy meeting under new Chair Kevin Warsh.

Treasury yields climbed, the US dollar strengthened, and investors reassessed expectations for future monetary policy.

Fed holds rates but signals possibility of hikes

The Federal Open Market Committee unanimously voted to keep its benchmark federal funds rate unchanged in a range of 3.5% to 3.75%, marking the fourth consecutive meeting without a rate change.

However, updated quarterly projections revealed a more hawkish outlook from policymakers.

Nine Federal Reserve officials projected at least one rate increase by the end of 2026, and the median estimate for the federal funds rate at year-end rose to 3.8%, up from 3.4% in March.

The policy statement also removed language that had previously indicated a likelihood of rate cuts this year.

Warsh broke with recent precedent by declining to submit an interest-rate projection as part of the Fed's quarterly forecasts.

During his press conference, he repeatedly emphasized the central bank's commitment to price stability.

Treasury yields jumped after the decision, with the two-year Treasury yield rising 15 basis points to 4.205%.

Investors react to hawkish tone

Analysts said the market's reaction reflected concerns that the Fed may need to maintain restrictive monetary policy for longer than previously expected.

Market expectations shifted significantly following the Fed's announcement.

According to CME Group's FedWatch tool, the probability that interest rates would remain unchanged by year-end fell to 15.7%, down from 40% on Tuesday.

Expectations for a quarter-point rate increase by December rose to nearly 38%, while the probability of a half-point increase climbed to almost 33%.

Technology stocks lead market losses

Major technology stocks led the broader market lower. Microsoft, Meta Platforms, Alphabet, and Amazon all traded in the red as investors pulled back from growth-oriented names that tend to be sensitive to higher interest rates.

Recently, public SpaceX also weighed on sentiment, falling for the first time since its initial public offering on Friday.

Some semiconductor stocks helped limit the broader decline. Shares of Intel and Micron Technology advanced during the session.

Elsewhere, shares of Allbirds surged after the former footwear company, now rebranded as Smartbird, announced the appointment of former Amazon executive Nadia Carlsten as chief executive officer.

The market weakness followed a strong rally from last Thursday through Monday, when falling oil prices and optimism surrounding a preliminary US-Iran peace agreement had boosted investor sentiment.

However, renewed uncertainty after President Donald Trump warned that the agreement with Iran was not final contributed to a more cautious tone in markets.