Fed's Hawkish Dot Plot Sinks Stocks, Warsh Rethinks Guidance

The S&P/TSX composite fell 264 points to 35,125.11 on Wednesday. In New York, the Dow dropped 507 points, the S&P 500 lost 91, and the Nasdaq shed 354. The trigger was the Federal Reserve's updated projections, which showed nine of 19 officials see a rate hike later this year.

The hold at 3.5%-3.75% was expected. The dot plot was not. "The projections are now hawkish," said Anish Chopra, managing director with Portfolio Management Corp. "That's really taken some of the shine off the earlier relief that markets got from lower oil prices."

Higher U.S. rates slow the economy and hurt investment prices. Markets are recalibrating, Chopra said.

Chairman Kevin Warsh did not submit a rate forecast. In his first press conference, he said he is considering a revamp of how the Fed communicates – specifically, ending the practice of dropping hints in statements about where rates are heading, a mechanism known as forward guidance. Warsh wants Wall Street to react to incoming data on inflation and employment based on how those numbers affect prices, not on how traders expect the Fed to react.

Oil prices steadied after earlier slides. Brent crude rose 0.7% to US$79.55. The August contract gained 74 cents to US$76.01. The tentative U.S.-Iran deal to reopen the Strait of Hormuz is the backdrop. Iran is set to take steps to restore flow once the deal is signed. "Markets are looking at the Middle East as less of an immediate supply shock and more of a fragile de-escalation story," Chopra said.

The Canadian dollar slipped to 71.26 cents US from 71.45 cents. Gold rose US$27 to US$4,381.40 an ounce.

The next scheduled Fed meeting is in late July. Warsh said he plans to use that session to present his communication overhaul to the full committee.