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 (^DJI -0.18%) tumbling more than 1%, and the broad-based S&P 500 (^GSPC +0.17%) and innovation-powered Nasdaq Composite (^IXIC +0.39%) edging lower.
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.
Fed’s Kevin Warsh says “this committee will deliver price stability.”
“Today’s policy action will support a timelier return to the committee’s 2% goal,” Warsh said in a policy meeting on Wednesday. pic.twitter.com/wjMtFQxHJ0
— Yahoo Finance (@YahooFinance) September 16, 2026
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.
The stock market entered 2026 at its second-priciest valuation since January 1871, according to the S&P 500’s Shiller Price-to-Earnings Ratio. The market is priced for perfection and is expecting AI growth rates to continue climbing. Anything that leads to a re-rating of growth rates or premium stock valuations could send a historically pricey stock market over the edge.
Additionally, the quarterly released Summary of Economic Projections, commonly known as the dot plot, forecasts another quarter-point hike to the federal funds target rate before the end of the year. In other words, there are tangible reasons for investors to be concerned.
Image source: Getty Images.
History would like a word with investors…
From a logic standpoint, there seems to be a straightforward line between raising and lowering interest rates.
On the one hand, raising borrowing costs would be expected to restrict corporate growth. Conversely, lowering interest rates is viewed favorably, as it encourages borrowing and can increase spending on hiring, acquisitions, and innovation. But this logic-based view on interest rates doesn’t always play out as planned.
For example, the central bank often undertakes rate-easing cycles when something is amiss. Though lower interest rates are favorable for businesses, the bigger story often associated with rate cuts is that the Fed is attempting to stimulate growth and/or job creation due to some underlying weakness.
At the other end of the spectrum, rate hikes typically occur during periods of outsize economic growth. These hikes are almost always enacted to keep inflation from getting out of hand.
This dynamic of rate hikes actually being a positive for equities is something that Carson Group’s Chief Market Strategist, Ryan Detrick, recently explored. Using data from Carson Investment Research and FactSet (FDS +1.79%), Detrick plotted out the performance of the benchmark S&P 500 following the start of all six previous Fed rate-hiking cycles since 1990.
The Fed hasn’t hiked in more than three years and they could in two weeks.
That first hike isn’t always a bad thing, but size appears to matter.
When the Fed hikes 0.25%, stocks still see early weakness, but never lower a year later.
A 0.50% hike to start things off and all… pic.twitter.com/6zj4W04VQJ
— Ryan Detrick, CMT (@RyanDetrick) September 3, 2026
As you’ll note, there’s one outlier: the 50-basis-point increase in March 2022. With trailing 12-month inflation reaching a four-decade high in June 2022, the FOMC had to be aggressive to bring inflation down. One year after this initial 50-basis-point rate hike, the benchmark S&P 500 was lower by 10.1%.
But it’s a completely different story when the central bank’s initial rate hike is the standard 25 basis points. Although the S&P 500 was lower 100% of the time one month after an initial quarter-point rate hike over the last 36 years, it was higher 100% of the time at the 12-month mark by an average of 12.5%.
Even though inflation remains persistently elevated, the building blocks for a strong economy are firmly in place: low unemployment, reasonably strong consumer spending, and otherworldly capital being thrown at the AI infrastructure build-out.
While several historical concerns remain, such as pricey stock valuations, roughly 36 years of initial rate-hike activity make clear that stocks are expected to rise over the next 12 months.
