A Fed Rate Hike May Be in the Cards on Sept. 16, and 36 Years of History Says the Stock Market Won't Be Happy (at Least Initially)

On May 22, the Federal Reserve entered a new era, with President Donald Trump's handpicked successor to Jerome Powell, Kevin Warsh, sworn in as the 17th Fed chair. It also marked a period of uncertainty amid this transition for the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC).

Warsh has wasted little time setting a new tone as head of the central bank. He's done away with forward-looking guidance in Federal Open Market Committee (FOMC) meeting statements and declared "the Fed's predominant focus right now should be on prices."

Fed Chair Kevin Warsh has declared that the FOMC will deliver price stability. Image source: Official Federal Reserve Photo.

Though FOMC policymakers are bound to uphold the dual mandate of maximum employment and price stability, the latter is of far greater importance at the moment. Trailing 12-month inflation reached a three-year high of 4.2% in May, driven primarily by Trumpflation vis-à-vis tariffs and the Iran war.

According to the CME Group's (NASDAQ:CME) proprietary FedWatch Tool, the odds are 50-50 that the FOMC hikes interest rates at its Sept. 15-16 meeting. While a rate hike would signal a direct approach to tackling above-average inflation, more than three decades of history says it could rattle stocks.

The stock market initially reacts poorly to Fed rate hikes, but perspective is everything

Since the start of 1990, the central bank has undertaken six rate-hiking cycles, with an average of 4.4 years between each cycle. According to data aggregated by Carson Investment Research and published on X (formerly Twitter) by Carson Group's Chief Market Strategist, Ryan Detrick, the initial stock market reaction after the first Fed rate hike was poor.

Over the last 36 years, the five quarter-point rate hikes undertaken by the central bank led to S&P 500 losses one month later 100% of the time. After three months, the benchmark index was lower 80% of the time, with an average decline of 2.7%.

The FOMC has only hiked by 50 basis points as its initial move once since 1990, and it was followed by double-digit percentage declines for the S&P 500 at the three-, six-, and 12-month marks.

The Fed hasn't hiked in more than three years and they could in two weeks.

That first hike isn't always a bad thing, but size appears to matter.

When the Fed hikes 0.25%, stocks still see early weakness, but never lower a year later.

A 0.50% hike to start things off and all… pic.twitter.com/6zj4W04VQJ

— Ryan Detrick, CMT (@RyanDetrick) September 3, 2026

There's clear concern that a Fed rate hike can derail Wall Street's artificial intelligence (AI)-driven rally. If it becomes more expensive to borrow capital, the partially debt-financed AI infrastructure build-out could slow, adversely affecting growth rates and exposing nosebleed AI stock valuations.

But the performance of stocks after an initial Fed rate hike truly depends on investors' perspective. While Detrick's data set shows that stocks react poorly initially, the S&P 500 was higher 100% of the time by an average of 12.5% one year after each quarter-point interest rate hike.

It's not uncommon for rate-hiking cycles to begin during periods of outsize economic growth. While investors often worry about the effects of rate hikes on Wall Street's leading businesses, they're essentially missing the forest (broad-based economic growth) for the trees (the potential for higher lending rates to slow growth for select companies).

If Fed Chair Kevin Warsh announces that he and the FOMC raised the federal funds target rate on Sept. 16, don't be surprised if stocks react negatively for the first couple of weeks, then bounce back with a vengeance.

Sean Williams 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.