He lost the middleweight crown to Al Hostak in his next to last fight, in a first round knockout of a scheduled fifteen round contest at the Seattle Civic Arena on July 26, 1938. After two light taps from Steele in the first round, Hostak floored his opponent briefly for the first time, and again shortly after for a count of five. Celebrity referee Jack Dempsey stopped the fight after Steele arose after his third fall to the mat before a record Seattle crowd of 35,000. After his third fall, Dempsey sent Steele to a neutral corner, and reached a count of seven before stopping the fight after Hostak tried to resume the fight.