The Federal Reserve raised interest rates on Wednesday as anticipated, yet the unanimous resolve among policymakers to combat inflation has led investors to brace for an extended period of elevated rates—though they remain optimistic about equities. The central bank raised the federal funds rate by 25 basis points to a target range of 3.75% to 4.00%, marking the first increase since 2023. Additionally, the Fed indicated another rate hike is likely later this year. The unanimous 12-0 vote underscored the central bank’s complete alignment on combating inflation, a stark contrast to the divided vote in July when policymakers were split on the appropriate course of action.
“When all Fed governors support a hike—even those historically more dovish—it signals that they are completely aligned on inflation being the top priority and that their work is likely not finished,” said Anshul Sharma, chief investment officer of Savvy Wealth. He added that the firm advises its advisers to prepare for a “higher for longer” interest rate environment.
According to the CME FedWatch Tool, markets continue to anticipate two additional rate hikes before year-end, with fed funds futures pricing in approximately a 40% chance that the benchmark rate will conclude December in the 4.25% to 4.50% range.
Following the Fed’s announcement, equities retreated. The Dow Jones Industrial Average fell over 600 points, or 1.2%, the S&P 500 declined by 0.5%, and the Nasdaq Composite closed slightly lower. Treasury yields moved higher across the curve; the U.S. 2-year yield spiked by over 7 basis points to 4.736%, the 10-year yield surpassed 5% again, and the 30-year yield remained flat at 5.359%. Yields and prices move in opposite directions, with one basis point equaling 0.01%.
Expectations for a rate hike at the September meeting had been mounting on Wall Street in recent weeks, particularly after Fed Chairman Kevin Warsh delivered a firm anti-inflation speech at Jackson Hole, Wyoming, last month. This was followed by a series of discouraging inflation reports, oil prices rebounding above $100 per barrel, and the 10-year Treasury yield crossing the 5% threshold—developments that convinced investors the Fed was backed into a corner.
Peter Boockvar, chief investment officer at OnePoint BFG Wealth Partners, noted that bonds have been in a prolonged bear market and will continue to dictate interest rates going forward. “The bond market adjusted rates first, and the Fed simply followed,” Boockvar explained. “While the Fed’s actions are undoubtedly important, I believe the bond market has essentially taken over the role of setting interest rates.”
Market Outlook This scenario could imply a more challenging environment for equities, yet investors remain broadly constructive given the economy’s underlying strength. Carol Schleif, chief market strategist at BMO, argued that the market is “misreading” the Fed’s rate hike. “The unanimous vote highlighted that this is a very strong economy,” she told CNBC, noting that fundamentals “remain very much intact,” citing robust consumer spending and employment figures.
Larry Adam, chief investment officer at Raymond James, echoed this sentiment, pointing to the resilience of corporate fundamentals. “I do not believe these interest rates will impact the equity market,” Adam stated, citing “strong” corporate profits and “healthy” balance sheets.
The interest rate-hiking cycle is considered “less of a concern” for hyperscalers, according to Brad Gastwirth, global head of research at Circular Technology, a firm that helps clients manage compute supply chains. Tech giants such as Alphabet, Amazon, Microsoft, and Meta have been investing billions of dollars into data centers, chips, servers, and networking equipment. “I do not believe this will derail hyperscale spending in the near or medium term,” Gastwirth said.
UBS advised that investors should focus less on the initial rate hike and more on the outlook for economic growth, corporate earnings, and inflation, as these factors are more critical for future stock returns. In a Tuesday client note, UBS stated that “U.S. equities have historically been resilient after the first Fed hike.” The firm examined 16 hiking cycles since 1954 and found that the S&P 500 averaged a 10.8% gain in the year following the first increase. Analysts cautioned that while this does not eliminate risk, it also does not warrant reducing equity exposure.
— CNBC’s Jeff Cox contributed to this report.
