There Is Now An 83% to 90% Chance the Fed Raises Interest Rates on Sept. 16. Here's What History Says Would Happen to the S&P 500 Index Next.

Following hot inflation data last week, there is now a high likelihood that the Federal Open Market Committee (FOMC), which dictates monetary policy for the Fed, will raise interest rates by a quarter point when its meeting concludes on Sept. 16.

According to CME Group's FedWatch tool, which uses 30-day federal funds futures prices to track the probability of a change in the Fed’s benchmark rate, there is over 90% likelihood that the Fed will raise rates at its meeting this week.

There is also an 83% likelihood on the prediction markets platform Kalshi that the federal funds rate will be above 3.75% after the Fed's September meeting, indicating a quarter-point hike.

Given that the odds of a rate hike are so high on both FedWatch and Kalshi, the market is at least somewhat pricing in a quarter-point hike this week.

Here's what history says would happen next to the broader benchmark S&P 500 (SNPINDEX:^GSPC) Index if such a scenario plays out.

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Rate hikes are typically bearish for stocks

Rate hikes have historically been a bearish signal for stocks for a few reasons.

Rate hikes make borrowing costs higher for consumers and businesses, which can slow the economy. Additionally, bond yields are at least somewhat influenced by the Fed's overnight lending rate, the federal funds rate.

Investors often use a longer-term U.S. Treasury yield, such as the one on the 10-year note, as the risk-free rate, which helps determine their discount rate in a discounted cash flow model.

The discount rate discounts cash flows back to their present value, so when the discount rate rises, the present value of future cash flows declines, lowering the company's valuation. In simpler terms, if safe assets like U.S. Treasuries yield more, then stocks have to generate higher returns for the risk to be worth it.

History has also shown that rate hikes aren't always so great for stocks.

Goldman Sachs Market Strategist Ben Snider and his team recently issued a research note stating that, at the beginning of seven hiking cycles over the past 20 years or so, the S&P 500 has returned -2% on average over the next three months.

"The medium-term impact of Fed tightening on equities will depend on how tightening affects earnings growth, which is the most important driver of stocks," Snider wrote.

A note from Charles Schwab shows that between 1946 and 2022, the S&P 500 averaged a six-month drawdown of 12.2% and an average one-year decline of 14%.

However, the speed of rate hikes matters.

The most severe sell-offs occur during a rapid rate-hiking cycle, in which the Fed raises rates at almost every meeting.

The sell-off is less severe in a slow-hiking cycle, in which the Fed waits at least one meeting in between hikes. The sell-off is the least severe in what Schwab refers to as a non-cycle, in which the Fed only conducts one or two hikes before cutting rates.

What to expect in this cycle

While there's a high likelihood the Fed will go ahead with a rate hike on Sept. 16, it still isn’t a guarantee, as Fed Chair Kevin Warsh has been less willing to provide forward guidance, though other FOMC members have.

The cycle is also hard to categorize because the Fed cut interest rates three times in 2025. As of this writing, FedWatch is pricing in four rate hikes between now and the end of 2027, including a September hike.

I don't think we'll see that many, especially if tensions between the U.S. and Iran de-escalate, but it's obviously hard to predict the future.

That said, stocks have enjoyed several good years now, so it would not surprise me to see a near-term sell-off. Goldman is right to say that investors need to watch S&P 500 earnings growth, which has been driving the market higher over the past few years.

The good news for long-term investors is that rate hikes have never stopped the S&P 500 from delivering strong returns over the long term, so investors with a longer time horizon can remain invested in the market.

Charles Schwab is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group and Goldman Sachs Group. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.