If the Fed Hikes Interest Rates in 2026, History Says This Is the Best Move Investors Can Make Now

All eyes are on the Federal Reserve, especially with the new chairman, Kevin Warsh, taking over from Jerome Powell in May. Investors have their eyes and ears on the central bank's actions and words. This isn't anything new.

Minutes from the most recent meeting, in June, showed that instead of cuts, an interest rate hike is fully on the table in 2026. Blame the resilient labor market or inflationary pressure from the Middle East conflict. According to the CME Group's CME FedWatch Tool, there's an 81.9% chance that the fed funds rate will be above the current target range after the December meeting.

History says the following is the best move investors can make right now.

Image source: Getty Images.

The smartest investors are doing absolutely nothing

Nearly all of the time, the best course of action is to do nothing. This is particularly true when it comes to buying stocks. These days, investors receive a fire hose of news, information, data, and commentary on a minute-by-minute basis. There's almost always no need to react to any of these.

This is also true with respect to the Federal Reserve. You might assume that what the world's most powerful economic entity does or says has a big impact on your portfolio. For investors with a time horizon of five years or (ideally) longer, though, it doesn't matter.

At the end of the day, the primary focus for investors remains the same. Building a diversified portfolio of at least 50 high-quality stocks remains the main goal, regardless of interest rate projections. If done right, this collection of businesses should be able to navigate whatever the economy throws its way.

Timing the market is an appealing strategy

Investing in the stock market might be one of the only fields in which inaction actually leads to better results than action. This reality doesn't diminish the human impulse to trade in and out of positions. We all want to successfully time the market, buying low and selling high to avoid the down days and capture the up days. But this leads to poor outcomes.

The market is now conditioned to believe that the Federal Reserve will hike interest rates this year. If this happens, or even if the central bank cuts rates unexpectedly, it still doesn't affect how investors should allocate capital. Always remember that time in the market is what matters, not timing the market.

Over the past decade, the S&P 500 (SNPINDEX: ^GSPC) index has generated a total return of 319% (as of July 10), despite various rate environments. That's an average annualized total return of 15.4%. History says to stay the course.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.