Stocks drop, bond yields rise; Fed keeps rates steady but projects hike for later this year

By Caroline Valetkevitch

NEW YORK, June 17 (Reuters) - Major stock indexes fell, bond yields rose and the U.S. dollar extended gains on Wednesday after the Federal Reserve held the benchmark interest rate steady and new projections showed officials expect a hike in borrowing costs later this year amid increasing inflation concerns.

Kevin Warsh, who took over as Fed chief last month, opened a new era for the U.S. central bank. He said in his debut press conference that forward guidance was not "well suited" to the current economic moment.

Projections among officials showed the policy interest rate, which has been set in the 3.50%-3.75% range since last December, would rise by a quarter of a percentage point by the end of this year. An updated policy statement removed language that had been used to flag the likelihood of further reductions in borrowing costs this year.

After the meeting, short-term U.S. interest-rate futures were pricing in a bigger chance that the Fed will deliver a rate hike as soon as September than opt to keep rates where they are, according to CME Group's FedWatch tool.

“Today’s meeting confirms that the Fed’s recent hawkish shift was not just about higher energy prices," said Kay Haigh, global head of fixed income and liquidity solutions at Goldman Sachs Asset Management in New York.

"Despite the recent pullback in oil, half of the members of the FOMC expect rate hikes as soon as this year, reflecting strong labor market and inflation data." 

The 10-year Treasury yield was up 3 basis points at 4.461% and the 2-year yield, which is most sensitive to the market's expectations for Fed rate action, was up 16 basis points at 4.207%, its highest since February 2025. Treasury yields were little changed earlier in the day. 

The Dow Jones Industrial Average fell 507.12 points, or 0.98%, to 51,492.55, the S&P 500 fell 91.25 points, or 1.21%, to 7,420.10 and the Nasdaq Composite fell 354.69 points, or 1.34%, to 26,021.66.

SpaceX shares were down for the first time since the stock's market debut last Friday. The stock was down 4.9%.

MSCI's gauge of stocks across the globe fell 7.18 points, or 0.64%, to 1,121.12. The pan-European STOXX 600 index ended up 0.52%.

The Bank of England meets on Thursday and, as with the Fed, no change in policy is expected, leaving the focus on the tone of policymakers' commentary.

The dollar strengthened across the board following the Fed news. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.5% to 100.01, the highest in nearly a week. The euro fell 0.5% to $1.1549.

Oil prices were higher. U.S. President Donald Trump defended his interim agreement with Iran, saying it had averted a global economic catastrophe, while warning he could launch fresh attacks if Tehran failed to honour its commitments. 

Brent crude futures rose 59 cents, or 0.75%, to settle at $79.55 a barrel, and U.S. West Texas Intermediate gained 74 cents, or 0.97%, to $76.79.

Recent declines in oil prices had begun to ease worries about an economic slowdown especially in energy-importing Europe. The International Energy Agency said the oil market will move into a significant supply surplus in 2027 after recovering from the closure of the Strait of Hormuz.

Spot gold fell 1.71% to $4,255.97 an ounce.

Investors also digested data showing U.S. retail sales jumped 0.9% last month after a downwardly revised 0.4% gain in April.

(Reporting by Caroline Valetkevitch in New York; additional reporting by Suzanne McGee and Danilo Masoni; Editing by Thomas Derpinghaus, Kirsten Donovan, Will Dunham, Nia Williams and Stephen Coates)