Fed Chair Kevin Warsh and the FOMC Just Hiked Interest Rates, and 36 Years of History Make Clear What Comes Next for Stocks Yahoo Finance Home sellers may have to 'take a hit' as rates rise, real estate experts say Fox B...
The big day that seemingly everyone had circled on their calendar for weeks, Sept. 16, lived up to the hype.
On Wednesday, Sept. 16, Fed Chair Kevin Warsh and the 11 other voting members of the Federal Open Market Committee (FOMC) raised the federal funds target rate by 25 basis points to a new range of 3.75%-4.00%. The first interest rate hike since July 2023 wasn't well-received by Wall Street, with the time-tested Dow Jones Industrial Average (DJINDICES:^DJI) tumbling more than 1%, and the broad-based S&P 500 (SNPINDEX:^GSPC) and innovation-powered Nasdaq Composite (NASDAQINDEX:^IXIC) edging lower.
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While Warsh's and the FOMC's actions are bound to raise questions and incite worry on Wall Street , nearly 36 years of history make clear what comes next for stocks.
Fed Chair Kevin Warsh and the FOMC just kicked off the first rate-hiking cycle in three years. Image source: Official Federal Reserve Photo.
To preface this discussion, there are always catalysts waiting in the wings to upend Wall Street. The central bank's interest rate decision and persistently elevated inflation are just some of these potential headwinds.
Nevertheless, Kevin Warsh's hawkish track record from his previous time on the Federal Reserve Board of Governors (Feb. 24, 2006 - March 31, 2011), coupled with his comments to the press after the Sept. 16 FOMC meeting as Fed chair, points to trouble for the stock market.
In particular, it was Warsh's placement of a loose timeline on the central bank's actions that appears to have stirred up Wall Street. Said the new Fed chair:
But inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2% goal. This Committee will deliver price stability.
Warsh's promise of a "timelier return" to the central bank's target inflation rate follows his Aug. 28 speech at Jackson Hole, where he proclaimed that inflation had to be moving toward the FOMC's objective, "clearly and at sufficient speed." Warsh's and the FOMC's lack of tolerance for persistently elevated inflation strongly indicates that a series of rate hikes, not just one, is on the way.
Raising interest rates is a dicey proposition amid the artificial intelligence (AI) infrastructure build-out. Although spending on AI data center infrastructure is off the charts, at least some of this capital is being financed with debt. Increasing borrowing costs can slow this expansion.
The stock market entered 2026 at its second-priciest valuation since January 1871, according to the S&P 500's Shiller Price-to-Earnings Ratio. The market is priced for perfection and is expecting AI growth rates to continue climbing. Anything that leads to a re-rating of growth rates or premium stock valuations could send a historically pricey stock market over the edge.
Additionally, the quarterly released Summary of Economic Projections, commonly known as the dot plot, forecasts another quarter-point hike to the federal funds target rate before the end of the year. In other words, there are tangible reasons for investors to be concerned.
From a logic standpoint, there seems to be a straightforward line between raising and lowering interest rates.
On the one hand, raising borrowing costs would be expected to restrict corporate growth. Conversely, lowering interest rates is viewed favorably, as it encourages borrowing and can increase spending on hiring, acquisitions, and innovation. But this logic-based view on interest rates doesn't always play out as planned.
Reporting synthesized and verified under Nexvoro.tech editorial guidelines. Full primary records referenced via Google News US Business & Markets.
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