The CME Group's FedWatch Tool puts the odds at 50-50 that the Federal Reserve raises interest rates at its Sept. 15-16 meeting, the first hike test under new Fed Chair Kevin Warsh. History from the past 36 years shows the S&P 500 has fallen in the month after each of the five quarter-point hikes since 1990, though it traded higher a year later every time.
The odds are 50-50 that the Federal Reserve raises interest rates at its Sept. 15-16 meeting, according to CME Group's FedWatch Tool. A hike would mark the first policy test for Kevin Warsh, who was sworn in as the 17th Fed chair on May 22 as President Donald Trump's handpicked successor to Jerome Powell.
Warsh puts prices ahead of jobs
Warsh has moved quickly to reset the Federal Open Market Committee's approach, dropping forward-looking guidance from meeting statements. According to The Motley Fool: "the Fed's predominant focus right now should be on prices", Warsh has said, even though the FOMC's dual mandate also covers maximum employment.
That focus follows a jump in trailing 12-month inflation to a three-year high of 4.2% in May, driven largely by tariffs and the Iran war. A rate hike would signal the FOMC is tackling that inflation head-on, but more than three decades of data say it could rattle stocks first.
Stocks stumble first, then recover
Since 1990, the central bank has run six rate-hiking cycles, spaced an average of 4.4 years apart. Data aggregated by Carson Investment Research and published by Carson Group's Chief Market Strategist Ryan Detrick shows the initial market reaction to each cycle's first hike has been rough.
Over the last 36 years, the five quarter-point rate hikes led to S&P 500 losses one month later 100% of the time. After three months, the index was lower 80% of the time, with an average decline of 2.7%. The one time since 1990 the FOMC opened a cycle with a 50-basis-point hike, double-digit percentage declines followed at the three-, six-, and 12-month marks.
There's concern a hike could slow Wall Street's partially debt-financed AI infrastructure build-out, pressuring growth and already-stretched valuations. But the picture looks different further out: the S&P 500 traded higher 100% of the time by an average of 12.5% one year after each quarter-point hike. Rate-hiking cycles often begin during periods of strong economic growth, and investors weighing the near-term risk to borrowing costs can lose sight of that broader backdrop.
If Warsh and the FOMC do raise the federal funds rate on Sept. 16, the early pattern points to a rough couple of weeks for stocks before any rebound takes hold.
Source: The Motley Fool
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