All that campaigning for the Fed job with dovish-sounding rhetoric was quickly set aside at the first meeting of the Warsh era. As Fed Chair, Kevin Warsh struck a much more hawkish tone, emphasizing the need to bring inflation under control. The message was reinforced by a dot plot that pointed to a more restrictive policy path than many had expected.
The result was a sharp move higher in Treasury yields and a stronger U.S. dollar. Stocks reacted as anticipated, moving lower, although the declines remained relatively orderly rather than turning into a broad-based selloff.
At the close:
- Dow Jones Industrial Average: -0.97%
- S&P 500: -1.21%
- Nasdaq Composite: -1.34%
- Russell 2000: -0.72%
From a technical perspective, the decline pushed the major indices below both their 100-hour and 200-hour moving averages, tilting the near-term bias back in favor of the sellers.
For the S&P 500, the 100-hour moving average is at 7488.34 and the 200-hour moving average is at 7462.77. The index closed at 7420.11, below both key levels.
For the Nasdaq, the 100-hour and 200-hour moving averages are converged near 26,335, while the index settled at 26,021.66, leaving it comfortably below both trend gauges.
Going forward, buyers will need to push the indices back above their respective 100-hour and 200-hour moving averages to regain near-term control. Until that happens, the technical advantage remains with the sellers.
Honestly, the stock market could have reacted much more negatively to the Fed’s hawkish shift. The relatively measured decline suggests investors may be looking beyond today’s tougher rhetoric and focusing on factors that could ultimately help the inflation outlook.
One possibility is the sharp decline in oil prices, which reduces input costs across a wide range of industries and eases pressure on consumers. Another is the growing belief that a more hawkish Fed stance could discourage companies from continuing to push through price increases. Businesses often have an easier time raising prices when costs are rising and inflation expectations are elevated. However, if energy prices stabilize or move lower and inflation pressures begin to ease, that pricing power becomes more difficult to justify.
Airfares will be one area to watch. Lower fuel costs typically work their way into airline economics, and if ticket prices fail to respond, expect increased scrutiny from both consumers and policymakers. With energy costs declining, the market may be betting that some of the inflation tailwinds that have supported higher prices across the economy begin to fade in the months ahead.
For now, investors appear willing to give that possibility the benefit of the doubt, which may help explain why stocks sold off, but not aggressively, despite the Fed’s more hawkish message. Now it may continue but for today, yes indices fell and the bullishness from lower oil prices is gone. However, it could have been worse.
