By Joseph Adinolfi and Joy Wiltermuth

Fed Chair Kevin Warsh has sent investors a message: When it comes to tamping down inflation, he means business

Kevin Warsh sent markets a message on Wednesday: He and the Fed mean business on inflation.

Heading into Wednesday's Federal Reserve decision, investors were hoping an interest-rate hike from the central bank could steady a shaky bond market and take some pressure off stocks.

Unfortunately, that's not what happened. While U.S. stocks and bonds initially rallied after the Fed confirmed the rate hike and released its latest batch of projections, both markets ultimately finished the day lower.

By the time the closing bell rang, the Dow Jones Industrial Average DJIA had fallen by more than 600 points. The 10-year Treasury yield BX:TMUBMUSD10Y inched higher, finishing the day above the key 5% threshold despite a reprieve from surging crude-oil prices (CL00) (BRN00). Bond yields move inversely with prices, rising as prices fall, and vice versa.

During Fed Chair Kevin Warsh's postmeeting press conference, Warsh insisted that the central bank was serious about driving inflation back to its 2% target.

The market appeared to take the chair at his word - unleashing a bout of volatility in markets, as investors wondered whether the Fed will ultimately deliver even more rate hikes than its latest batch of projections suggest, said Gene Goldman, CIO at Cetera Financial Group.

A few months ago, investors were worried that Warsh's tough talk on inflation, paired with a lack of actionable follow-through by the Fed, could hurt the central bank's credibility and ultimately weigh on markets.

But by insisting that the Fed is indeed serious about driving inflation back down to 2%, Warsh put investors in another uncomfortable position. They now need to contemplate exactly how far the Fed will go to get inflation back under control, as well as what a longer Fed hiking cycle might mean for markets and the economy.

"They are clearly signaling an intention to deliver two or three hikes," said Stephen Douglass, chief economist at NISA Investment Advisors.

For now, the path forward looks as murky as ever. Whatever happens next will likely hinge on the outcome of the conflict with Iran, which has dragged on into a seventh month with no end in sight. During the early days of the war, some oil experts were warning of a risk that oil prices might climb as high as $200 a barrel.

While that extreme scenario never materialized, oil prices have climbed back above $100 a barrel - well above prewar levels - and few expect them to fall significantly unless Washington strikes a deal with Tehran to end the war.

This means that for now, the crude-oil market will likely continue to drive moves in stocks and bonds, said Vincent Ahn, president and portfolio manager at SLW Investments. After all, a rate hike won't reopen a pipeline, he noted.

Try as it might, the Fed also can't reopen the Strait of Hormuz - a fact that one senior Iranian official appeared to joke about earlier Wednesday in a post on X. While investors had fretted over the summer about a credibility crisis at the Fed, the question now is whether investors' portfolios will become collateral damage as Warsh and his colleagues indeed appear willing to take aggressive steps to combat inflation.

Whatever happens, more volatility for financial markets is likely in store, said Byron Anderson, head of fixed income at Laffer Tengler Investments. "A single rate cut is not going to placate this bond market for long and will not solve inflation," Anderson said.

Furthermore, if oil shoots up to $125 a barrel, long-end yields, already at 19-year highs, will continue moving higher, said George Catrambone, head of fixed income, Americas, at DWS.

That would deal another blow to consumers already dealing with high gas prices at the pump, he said. On top of that, further rate hikes aimed at taming inflation also risk slowing down the economy.

Christine Idzelis contributed.

-Joseph Adinolfi -Joy Wiltermuth

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