A Hawkish Fed Signals Higher Interest Rates Ahead

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Alex Ossola (0:34)

The Fed holds rates steady, but officials hawkish tone sends stocks sliding. Plus, Tim Cook tells the Journal that price increases on Apple products are quote unavoidable, and US officials spell out the terms of the Iran peace deal.

Laurence Norman (0:48)

Iran is walking away, basically being paid to reopen the Strait of Hormuz with no significant hard commitments that it will make on the nuclear program and ballistic missiles.

Alex Ossola (1:01)

It's Wednesday, June 17th. I'm Alex Ossola for The Wall Street Journal. This is the PM Edition of What's News, the top headlines and business stories that move the world today.

The Federal Reserve today held its benchmark rate steady, between 3.5 and 3.75%, as was widely expected. Officials were unanimous in that decision, but they hinted more strongly that their next move will be a rate hike. It was the first meeting led by new Fed Chairman Kevin Warsh, and the central bank under him might look different.

Kevin Warsh (1:35)

Change isn't easy, change is filled with risk, but our number one goal is to get monetary policy right. The way to get monetary policy right is to deliver on the remit that Congress gave us, to deliver on price stability.

Alex Ossola (1:49)

We'll get into those changes with WSJ Economics reporter Matt Grossman, who joins us now.

But first, Matt, the policy. The big news from today's meeting is that Fed officials seem to be leaning more towards a rate hike because of the worsening outlook on inflation. Would that be a big shift for Warsh, who Trump put in the role to cut rates?

Matt Grossman (2:08)

Yeah, this was a very hawkish Fed meeting, which we saw especially in the dot plot, which is where the Fed officials lay out their forward-looking interest rate expectations. About half the committee wrote down that they expect the Fed might need to raise rates this year, which is a big shift for March when no one on the Fed's committee saw rate hikes as the right move this year. We didn't hear too much from Warsh personally about what he thinks the Fed needs to do. The policy statement was very terse.

Warsh did not say much about his own views of the Fed's next move in the press conference, and he did not participate in the dot plot, so he is not one of the Fed officials who submitted a forecast for what the central bank is going to do next. He was pretty candid about some of the ways that he plans to move the Fed forward, laying out a lot of plans to convene experts to review different ways that the Fed operates, including how it communicates with the public, how it handles economic data, a whole host of things that seem to be at the top of Warsh's list of priorities.

Alex Ossola (3:13)

What does that mean for investors? I mean, can we expect more market volatility as investors are flying a little bit more blind?

Matt Grossman (3:20)

Under Chair Powell, by the time a Fed meeting rolled around, markets had a pretty good idea about what the Fed was likely to do. It wasn't likely that the Fed was going to raise rates without having signaled that beforehand. We'll really have to see how the Fed communicates over the next six weeks. Of course, some of that is under Chairman Warsh's purview. Some of it isn't because the Fed also has 12 regional reserve bank presidents who don't answer to the Fed in Washington.

We'll have to see how they communicate. By the time the July meeting rolls around, we may or may not have a good idea of what exactly is on the table.

Alex Ossola (3:59)

That was WSJ Economics reporter, Matt Grossman. Thank you, Matt.

Matt Grossman (4:03)

Thank you.

Alex Ossola (4:04)

Markets had a strong reaction to today's Fed decision. Treasury yields rose and stock indexes fell. As you heard from Matt, it was a hawkish meeting, and investors took the emphasis on price stability as a sign that the Fed might soon raise interest rates. The Nasdaq fell 1.3 percent, the S&P dropped 1.2 percent, and the Dow was off 1 percent. Elon Musk's SpaceX lost nearly 5 percent today, its first drop since Friday's IPO.