Fed chair Kevin Warsh raised interest rates by a quarter point last week, the first hike in three years. History from the two prior hike cycles shows the Nasdaq Composite fell in the following six months but gained sharply within two years.
Federal Reserve chair Kevin Warsh raised interest rates by a quarter point last week, marking the first such move in three years. The Nasdaq Composite closed at 26,939.37, up 0.01% on the day.
The move ends a rate-cutting path the central bank had followed since 2024, a trend generally seen as supportive of consumers and companies, particularly growth-oriented technology names. Rising inflation prompted the shift, and the CME FedWatch tool shows a 53% probability of a rate hike during the Fed's October meeting.
Higher rates raise borrowing costs
An interest rate hike has a trickle-down effect, pushing up credit card rates as well as rates on adjustable-rate mortgages, auto loans and student loans. One hike probably won't make a big difference for most borrowers, but it remains unclear whether last week's move was isolated or the start of further increases.
Higher rates also mean weaker consumer buying power, as spending shifts toward essentials, which could affect sales at Nasdaq-listed companies. Investors may also favor bonds over stocks, since yields on bonds, particularly short-term treasuries, often move alongside the Fed's rate decisions. Higher rates raise borrowing costs for companies too, adding to the cost of investing in growth, though this single hike won't drastically increase costs for companies.
What happened after the last two hike cycles
The two prior rate-hike cycles began in December 2015 and March 2022. In the six months that followed each, the Nasdaq declined by 4% after the 2015 hike and by 15% after the 2022 hike.
But two years after each first increase, the Nasdaq had risen by 38% after the 2015 hike and by 17% after the 2022 hike. The pattern suggests near-term declines following a hike have historically proven temporary, with the index going on to climb over longer periods regardless of what triggered the initial pullback.
Source: The Motley Fool
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