The big day that seemingly everyone had circled on their calendar for weeks, Sept. 16, lived up to the hype.
On Wednesday, Sept. 16, Fed Chair Kevin Warsh and the 11 other voting members of the Federal Open Market Committee (FOMC) raised the federal funds target rate by 25 basis points to a new range of 3.75%-4.00%. The first interest rate hike since July 2023 wasn’t well-received by Wall Street, with the time-tested Dow Jones Industrial Average (DJINDICES:^DJI) tumbling more than 1%, and the broad-based S&P 500 (SNPINDEX:^GSPC) and innovation-powered Nasdaq Composite (NASDAQINDEX:^IXIC) edging lower.
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While Warsh’s and the FOMC’s actions are bound to raise questions and incite worry on Wall Street, nearly 36 years of history make clear what comes next for stocks.
Fed Chair Kevin Warsh and the FOMC just kicked off the first rate-hiking cycle in three years. Image source: Official Federal Reserve Photo.
Fed Chair Warsh wants a “timelier return” to the central bank’s long-term inflation target
To preface this discussion, there are always catalysts waiting in the wings to upend Wall Street. The central bank’s interest rate decision and persistently elevated inflation are just some of these potential headwinds.
Nevertheless, Kevin Warsh’s hawkish track record from his previous time on the Federal Reserve Board of Governors (Feb. 24, 2006 – March 31, 2011), coupled with his comments to the press after the Sept. 16 FOMC meeting as Fed chair, points to trouble for the stock market.
In particular, it was Warsh’s placement of a loose timeline on the central bank’s actions that appears to have stirred up Wall Street. Said the new Fed chair:
But inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2% goal. This Committee will deliver price stability.
Warsh’s promise of a “timelier return” to the central bank’s target inflation rate follows his Aug. 28 speech at Jackson Hole, where he proclaimed that inflation had to be moving toward the FOMC’s objective, “clearly and at sufficient speed.” Warsh’s and the FOMC’s lack of tolerance for persistently elevated inflation strongly indicates that a series of rate hikes, not just one, is on the way.
Raising interest rates is a dicey proposition amid the artificial intelligence (AI) infrastructure build-out. Although spending on AI data center infrastructure is off the charts, at least some of this capital is being financed with debt. Increasing borrowing costs can slow this expansion.
