The Federal Reserve Raises Interest Rates for the First Time in 3 Years. Here's What Investors Need to Know.

Today, in a unanimous 12-0 vote, the Federal Reserve's Federal Open Market Committee (FOMC) voted to raise its benchmark federal funds interest rate by a quarter point, to a range of 3.75% to 4%.

The move was largely expected, given recent comments by several Fed governors expressing concern about inflation, which has been above the Fed's 2% benchmark for more than five straight years.

But even though interest rate hikes are the Fed's primary means of combating inflation, this is its first interest rate increase since July 2023.

Here's why the Fed finally bit the bullet and raised rates, and how it's likely to affect the stock market moving forward.

Image source: The Federal Reserve.

Recent data made the decision easier

"The decision we made today was a sober decision, a serious decision, a responsible decision," Fed Chairman Kevin Warsh said in response to a reporter's question at the press conference following the meeting.

Although Warsh has ended the practice of offering "forward guidance" signaling future Fed actions, his comments at last month's Jackson Hole economic symposium suggested that he believed the economy could absorb an interest rate hike without triggering a big increase in unemployment or a sizable drop in economic activity.

"Real consumer spending has been healthy despite the shocks, increasing more than 2 percent over the past four quarters," Warsh said at Jackson Hole.

He also noted, "The jobless rate, at 4.1%, remains low by historical standards and has not changed much for a couple of years. Unemployment claims ... are near their lowest level in decades."

When the August jobs report came out on Sept. 4, showing a robust gain of 162,000 jobs and an unchanged unemployment rate, the likelihood of a rate hike increased. And when the August Consumer Price Index (CPI) was released on Sept. 11, showing a 3.4% annual inflation rate, analysts began viewing a rate hike as a near-certainty.

Sure enough, the vote to raise rates was unanimous, suggesting broad agreement among the FOMC members that rate hikes are needed to curb inflation.

Could more hikes be on the way?

Historically, the Fed has seldom raised rates by only a quarter percentage point. It often issues several rate increases in rapid succession.

Image source: The Motley Fool.

According to the Fed's Summary of Economic Projections – often referred to as the "dot plot" – 12 of the 18 Fed policymakers expect one more quarter-point increase before the end of the year. 4 others think there will be two more hikes, for a half-point increase in total. And just 2 of the 18 expect rates to remain unchanged for the rest of the year.

None of them expect rates to go down.

President Trump, on the other hand, has been a strong proponent of lowering interest rates, a fact acknowledged by a reporter at today's post-meeting press conference with Warsh.

"What is your message to President Trump?" asked an ABC correspondent, in reference to the president's desire for rates to be lowered.

Warsh responded with a chuckle. "I've got nothing for you" on that topic, he replied.

An immediate impact

Even though today's rate hike was widely seen as inevitable, the market still reacted negatively. The S&P 500 tumbled more than 1% after the meeting, likely in response to the suggestion that further rate cuts were coming later in the year, although they rebounded slightly before the market closed.

Sectors affected by rising interest rates are likely to see the biggest impact from today's decision. With 30-year mortgage rates already above 7.1%, homebuilders and other real estate stocks may be negatively affected. Businesses with high levels of debt may also feel pressure if they need to refinance or borrow more, while banks and other lenders are likely to benefit.

Unfortunately for inflation-weary consumers, the Fed's rate increases aren't likely to have an immediate effect on rising prices, which are being driven further upward by tariffs and the war in Iran. In fact, the Fed itself doesn't expect to hit its 2% target inflation until 2029.

For now, it looks as though the economy is chugging along despite high inflation and the prospect of further interest rate hikes. That said, investors will want to keep a close eye on their portfolios and ensure their investments aren't overly concentrated in sectors likely to be adversely affected by these trends.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.