Wall Street's major indices closed lower on Wednesday (Thursday AEST) after the Federal Reserve left interest rates unchanged but signalled that further tightening may be required later this year to address persistent inflation pressures.
The Dow Jones Industrial Average dropped 507.1 points, or 1%, to 51,492.6, ending a run of two consecutive record-high closes. The S&P 500 fell 91.3 points, or 1.2%, to 7,420.1, while the Nasdaq Composite declined 354.7 points, or 1.3%, to 26,021.7.
The Federal Reserve kept its benchmark interest rate unchanged within a target range of 3.50% to 3.75%, in line with market expectations.
However, updated quarterly projections revealed that nine policymakers expect at least one rate increase before the end of 2026 as inflation remains above target.
The central bank's policy statement also removed previous language indicating that rate cuts were likely this year, reinforcing a more hawkish outlook.
In his first meeting as Federal Reserve Chair, Kevin Warsh emphasised the central bank's commitment to restoring price stability.
Warsh told reporters that the Federal Reserve would deliver on its inflation mandate and described the beginning of a "new chapter" for the institution.
Departing from recent practice, he did not provide an individual interest-rate forecast in the quarterly economic projections.
Policymakers had been widely expected to leave rates unchanged as they assessed inflationary pressures linked to the oil-price surge during the Iran conflict.
Following the announcement, traders significantly increased bets that the Federal Reserve could raise rates as early as September.
According to the CME Group FedWatch Tool, futures markets were pricing a greater probability of a rate increase than a decision to leave rates unchanged.
Market expectations for rates to remain steady through the end of the year fell sharply, with the probability dropping to 15.5% from 40% on Tuesday.
Warsh also unveiled a broad review of Federal Reserve policymaking processes. He said he wanted financial markets to focus more on underlying economic data rather than attempting to anticipate policymakers' thinking.
Among individual stocks, SpaceX shares fell 4.9%, marking the space and artificial intelligence company's first decline since its market debut on Friday.
CME Group lost 3.5% after the exchange operator announced that chief executive Terry Duffy will step down on 1 March and transition to the role of executive chairman.
Allbirds surged 39.1% after the footwear company, which has shifted its focus towards artificial intelligence, rebranded as Smartbird and appointed former Amazon executive Nadia Carlsten as chief executive officer.
Earlier economic data provided evidence of continued consumer resilience. U.S. retail sales rose more than expected in May, up 0.9% versus 0.5% expected, driven by higher motor vehicle purchases despite higher petrol prices.
Bond yields also moved higher following the Federal Reserve's policy update. The yield on the 10-year U.S. Treasury rose 1.1% to 4.487%, while the two-year Treasury yield climbed 3.3% to 4.186%.
