Fed held rates Wednesday. Markets sold off anyway. Then overnight futures recovered. Here is what actually happened and why traders changed their minds so quickly.
Wednesday Was Calm Until It Was Not
Federal Reserve kept rates unchanged at 3.5% to 3.75% on Wednesday. That was exactly what everyone expected. For about five minutes it looked like a non-event.
Then the details came out and the mood changed fast. Nasdaq dropped 1.3% after the announcement. S&P 500 fell 1.2%. Dow pulled back too despite touching another intraday record earlier in the session. Not a catastrophic selloff but a sharp one given how calm things had been going into the meeting.
What spooked people was not the rate decision. It was the dot plot and what Kevin Warsh did or did not do with it.
Warsh Skipped His Own Dot
New Fed chair Kevin Warsh chose not to submit his own interest rate forecast to the dot plot. That is the chart where each Fed official puts a dot showing where they think rates are headed. Warsh left his blank.
That created its own kind of uncertainty. When the person running the Fed does not show their hand traders have to guess. And when traders guess they often assume the worst. Warsh has said publicly he thinks the Fed talks too much. Leaving his dot out was consistent with that philosophy. But it left markets without a clear signal from the most important person in the room.
The dots that were submitted painted a more hawkish picture than March. Median year-end rate forecast moved up to 3.8% from 3.4%. That implies at least one rate hike could happen before the end of 2026. Several officials now see rates moving higher this year. That is a shift from where expectations were sitting just a few months ago.
Futures Bounced Back Overnight
By Thursday morning the tone had changed again. Nasdaq futures up 1.3%. S&P 500 futures gained 0.9%. Dow futures added roughly 300 points. Overnight recovery after Wednesday’s session close.
Asia helped the mood. South Korea Kospi crossed 9,000 for the first time ever. Japan Nikkei pushed to fresh record highs. Global markets were not reading Wednesday’s Fed as a disaster. More like an adjustment.
Traders overnight seemed to land on a different interpretation than the one that caused Wednesday’s selloff. Instead of hearing a Fed that is about to cause pain they heard a Fed that is managing inflation carefully and feels confident enough in the economy to consider tightening further if needed. Same facts. Different reading.
Hawkish Does Not Always Mean Bad
Higher rate expectations are usually negative for stocks especially growth and tech names. Borrowing gets more expensive. Future earnings get discounted more heavily. Valuations come under pressure.
But there is another way to read a hawkish Fed. If policymakers feel comfortable enough to raise rates it means they think the economy can handle it. An economy strong enough to handle rate hikes is an economy where companies can still grow earnings and consumers can still spend.
That second reading is what futures markets appear to be pricing in Thursday morning. Whether that interpretation holds through the trading session is the real question. Wednesday’s reaction and Thursday’s reversal happening within hours of each other shows how unsettled traders actually are about where things are heading.
One More Thing to Watch Today
Iran peace deal signing is scheduled for Friday in Switzerland. That has been hanging over markets all week as a potential positive catalyst. If it happens cleanly and without last minute complications it removes a major uncertainty that has been affecting oil prices, inflation expectations, and rate forecasts all at once.
A signed deal Friday combined with a market that has already partially recovered from Wednesday’s Fed shock could set up a decent end to the week. A lot of things have to go right in a short period of time. But the pieces are at least pointing in that direction for now.