On Wednesday, stocks dropped significantly due to inflation worries after the Federal Reserve opted to keep interest rates steady. Meanwhile, oil prices surged nearly 6% amid fears of a prolonged conflict involving Iran.
The Dow Jones Industrial Average declined by 1,150 points, translating to a 2.2% decrease. The S&P 500 and Nasdaq followed suit, falling by 1.5% and 1.7%, respectively.
Earlier in the day, the Fed chose to maintain interest rates. However, three presidents from the central bank opposed this decision, suggesting that rates should be increased given the ongoing inflation.
Fed Chairman Kevin Warsh didn’t provide clarity on how he plans to tackle inflation or when rates might rise during a press conference. This left many traders wondering how the Fed will manage to curb rising prices effectively.
Concerns about a possible AI bubble and competition from Chinese technology also exerted pressure on the stock market. U.S. chip manufacturers, including AMD, Nvidia, and Broadcom, saw declines of 6%, 7%, and 11%, respectively.
Investors reacted nervously to President Trump’s announcement of retaliation against Iran following a missile attack aimed at U.S. troops in Jordan late at night.
Brent crude oil prices increased by 6.6% to $90.65 per barrel, while West Texas Intermediate crude rose 5.4% to $84.66. These increases stemmed from worries that escalating Middle Eastern conflict could exacerbate existing energy supply disruptions.
U.S. Central Command reported that all missiles involved in the attack were intercepted successfully.
In a brief interview, Trump stated, “We’re going to hit them hard,” promising a strong response to the situation but also mentioning that discussions with Iran would persist: “We’re going to keep them talking.”
In related military actions, U.S. and Saudi jets targeted various terrorist logistics and weapon sites in eastern Iraq, responding to over 30 drone strikes from Iranian-aligned groups within just three days, according to Centcom.
This new threat appears just before Warsh’s second meeting as Fed chairman, where rates are mostly anticipated to remain in the 3.5% to 3.75% range.
Warsh’s unexpectedly tough approach to inflation has diminished hopes for a near-term rate cut. The ongoing Middle Eastern conflict might push energy prices higher, causing the likelihood of a rate hike to rise to around 35% in light of Wednesday’s meeting, according to CME FedWatch.
Currently, more than half of traders anticipate that the Fed will raise interest rates by a quarter of a percentage point before September.
On another note, the UK Maritime Trade Operations Center reported “suspicious activity” in the Red Sea, following Houthi attacks on shipping vessels in the area last week.
Meanwhile, the Strait of Hormuz, a crucial route for 20% of the world’s oil from the Persian Gulf, has faced significant disruptions for months due to the ongoing war with Iran, leading U.S. gasoline prices to exceed $4 per gallon.
Additionally, the latest reports of attacks in the Red Sea have sparked renewed concerns about possible threats to a vital shipping route through the Bab el-Mandeb strait, important for about 7% of global oil supplies.
