The Fed Raised Rates, So Now What?

Six Things You Should Know

1. Equity Markets – were down this week with U.S. stocks (S&P 500) losing .34% while international stocks (EAFE) dropped 1.62%.
2. Fixed Income Markets – were down this week with investment grade bonds (AGG) declining .02% and high yield bonds (JNK) sliding .06%.
3. Rate Hike – The Fed unanimously raised its benchmark rate by 25 basis points to 3.75%–4.00%, its first increase since 2023, citing persistent inflation alongside resilient growth and a stable labor market. The decision signals a renewed inflation-fighting stance and suggests monetary policy may remain restrictive—and potentially tighten further—until inflation moves convincingly toward 2%.
4. U.S./Iran Update – The U.S.–Iran conflict remained tense this week as Iran claimed an attack on an oil tanker in the Strait of Hormuz and threatened unauthorized vessels, while the U.S. maintained that the vital waterway remains open. Although Washington approved visas for senior Iranian leaders to attend the U.N. General Assembly, ongoing shipping disruptions and the risk of renewed strikes continue to threaten regional stability and energy markets.
5. Cybersecurity Reminder – Scammers are increasingly using Remote Access Tools (RATs) along with phishing emails or texts to take control of devices like phones, tablets, and computers. Once installed, these tools can give cybercriminals access to sensitive information, including your Schwab accounts. These attacks can be hard to spot, so if something doesn’t feel right- like unusual account activity or suspicious messages- trust your instincts. If you sense suspicious activity, please call us immediately or report any concerns to Schwab at 800-515-2157. 
6. Key Insight – This week we reflect on the latest decision from the Federal Reserve, the market’s current reaction, what similar decisions have meant to markets historically with a bit more time and perspective, and key thoughts for investors to consider regarding how they should or shouldn’t react.

Insights for Investors

By Tim Mitrovich

The Fed Raised Rates So Now What 

Five Key Takeaways from the Fed’s Announcement

The Fed Raised Rates So Now What 

After spending much of the last few years wondering when the Federal Reserve would cut interest rates, investors now find themselves asking an entirely different question: How many times might the Fed raise them? 

Today, the Federal Reserve increased the federal-funds target range by 0.25 percentage points from 3.75% to 4.00%. It was the first increase since July 2023 and the first under Chairman Kevin Warsh. The vote was unanimous, which was noteworthy given the disagreement among Fed officials earlier this year. [1] 

The Fed’s explanation was relatively straightforward. Economic activity remains solid, domestic spending has been resilient, productivity growth is strong, and capital investment remains robust. Unfortunately, inflation also remains above the Fed’s 2% target. In other words, the economy is strong enough that the Fed believes it can absorb higher rates, while inflation is persistent enough that the Fed believes it needs to try. [1] 

The Fed also made clear that today may not be a “one and done” event. Sixteen of 18 policymakers projected at least one additional quarter-point increase before year-end. [2] 

Donald Luskin of TrendMacro summarized today’s announcement, and more importantly his outlook on what lies ahead by stating, “The Fed hiked the funds rate by 25 bp, as was broadly expected by markets. The “dot plots” show one more rate hike this year and none beyond that. Yet the curve, priced coming into the meeting for this being the beginning of a cycle of more than three hikes, has come to expect more hikes in the aftermath. We think this is wrong, and will be reversed. What has the curve spooked? Is it that the statement said this hike was to “support a timelier return” to the Fed’s target? If it’s not about direction, only impatience with timing, then this is hardly a surprisingly hawkish view. Yet the SEP shows inflation at target only in 2029. Warsh tried to deflect that contradiction with humor, but apparently the joke didn’t land. It is evident the Fed see the economy as strong enough to grant them “a get out of inflation free” card. We don’t disagree – this very well expected hike, and the one more the “dot plots” are calling for, will do no cyclical damage.” (Source: TrendMacro, 9/16/26) 

So, should investors be worried? Let’s explore. 

Markets React to Surprises 

Many investors assume that a rate hike is automatically bad for stocks. Sometimes it is, but markets are rarely that simple. 

The futures market assigned more than a 90% probability to a quarter-point increase immediately before the announcement. The hike had already been debated, anticipated, and incorporated to a meaningful degree into stock and bond prices. [3] 

Markets moved in both directions after the announcement as investors tried to interpret Chairman Warsh’s comments and the Fed’s projections. As of closing the afternoon of the announcement, the S&P 500 and Nasdaq were down modestly, while the Dow was down a little over one percent, and the 10-year Treasury yield remained near 5%. [3] 

The market was not simply deciding whether it “liked” the increase. It was trying to calculate whether inflation will require one more hike, several more hikes, or enough tightening to damage economic growth. That calculation cannot be completed in a single afternoon. 

The First Hike Often Brings Volatility 

There is a difference between saying stocks may experience volatility after a rate increase and saying investors should sell their stocks. History supports the former far more than the latter. 

In fact, the history around what rate hikes really mean for markets may surprise you. 

LPL Financial reviewed the six rate-hiking cycles that have occurred since 1994. On average, the S&P 500 posted negative returns during the first four months after the initial increase, then improved during months five and six. Twelve months after the first hike, the index had produced an average gain of 6.7% and a median gain of 10.7%. [4] 

Similarly, Yahoo Finance reported, “The S&P 500 has declined by an average of 4.0% over the six weeks following the first Fed rate hike of a cycle across seven such episodes since 1988, per new analysis from strategists at The Kobeissi Letter. Stocks recovered all of those losses over the next five to six weeks on average. In the six months following the first interest rate hike, the S&P 500 returned 4% on average. After 12 months, the S&P 500’s average gain tallied 9%. Positive returns have occurred in every episode except 2022 over the 12 months. ‘Fed rate hikes have historically been great buying opportunities,” the strategists added.’” (Source: Fed Hikes Initially Hurt Markets, But Then…) 

Dow Jones Market Data found a similar pattern. The S&P 500 was down an average of 3.8% two months after the initial hike. By six months, it had recovered to an average gain of 3.1%, while the Nasdaq had gained nearly 11% on average. [5] 

That sounds reassuring, but there is an important catch. Charles Schwab’s study of 18 postwar tightening cycles found that the S&P 500 experienced an average maximum decline of approximately 12% during the first six months and 14% during the first year after the initial hike. [6] 

However, from a technical perspective, (as the market does not move in a vacuum or based on a single variable) Mark Newton of Fundstrat believes today’s pullback could signal the bottoming out of the US market and an attractive buying opportunity. He stated, “the S&P 500’s expected low could arrive this week, and a brief post-FOMC undercut of recent lows into the 7,550–7,565 zone would complete the pattern and represent an attractive buying opportunity.” 

How can the market suffer a 12% or 14% decline and still finish the period higher? Because markets rarely travel in straight lines. A positive 12-month return does not mean there was no pain, uncertainty, or temptation to abandon the plan along the way. 

However, the bigger question is the overall direction of the economy, not trying to predict or react to every data point along the way. To that end, Tom Lee of Fundstrat post-Fed announcement expressed optimism which was summarized by his team with the statement, “As Head of Research Tom Lee pointed out later, all of this is arguably quite a vote of confidence in the economy. The SEP can easily be interpreted as evidence that the members believe that the economy is strong enough to handle even a 50 bps increase.” (Source: Fundstrat, 9/16/26) 

Is the Fed Taking the Stairs or the Elevator 

The more important question is not whether the Fed raised rates today. It is how quickly the Fed intends to move from here. 

Think of the difference between taking the stairs and taking the elevator. Both may reach the same floor, but one gets there much faster and may be considerably more uncomfortable for financial markets. 

Historically, slower cycles in which the Fed pauses between increases have produced better economic and market outcomes. Faster cycles, with increases at nearly every meeting, have tended to create larger stock market declines and greater recession risk. [6] 

The 2022 experience is the obvious warning. The Fed began with rates near zero, inflation had risen dramatically, and policymakers were forced to increase rates rapidly. The S&P 500 eventually declined approximately 25% from its high. Today’s starting point is different: rates were already elevated, the economy continues to grow, and the Fed is not moving from zero to restrictive policy in a matter of months. [4] 

Different does not necessarily mean easy, but it means 2022 should not automatically become the template for what happens next. 

What Thoughtful Market Observers Are Saying 

Before the announcement, Fundstrat’s Tom Lee argued that a hike could potentially trigger a meaningful equity rally if it convinced investors that the Fed was staying ahead of inflation. [7] 

Why might stocks rally when borrowing costs are increasing?  

A credible Fed that acts early may reduce the probability that inflation becomes entrenched and requires much more aggressive action later.  

Sometimes taking a little medicine today reduces the likelihood of needing much more tomorrow. 

What Should Investors Do 

Our answer is probably less exciting than what you will hear from many market commentators in search of “clicks”: Understand what you own, why you own it, and what role it is intended to play. 

We do not believe investors should make significant portfolio changes based solely on one Fed meeting. We also do not believe today’s decision should simply be ignored. 

Higher rates can challenge highly leveraged companies, speculative investments, long-duration assets, and businesses whose valuations depend heavily on profits far into the future. At the same time, higher yields continue to create attractive income opportunities in short-duration bonds, high-quality credit, and other areas that offered little income during the years of near-zero rates. 

The good news is that investors do not need to predict the exact number or timing of future Fed increases to be successful. The less exciting news is that successful investing still requires patience, diversification, discipline, and a willingness to accept periods of volatility. 

Today’s decision gives investors something new to consider, but it does not change the purpose of a well-designed portfolio.  

The objective for investors is to build a portfolio that can continue moving you toward your goals through a variety of possible outcomes.  

To accomplish that one needs to evaluate things through our “L.I.V.E.” framework to make sure they have 1) Liquidity through safe daily liquid holdings, 2) Income – stable and sufficient to meet their needs, 3) Volatility – commensurate with the emotional tolerance, and 4) Expected Return – viewed through an intermediate to long-term time frame. 

Monitoring and building such a portfolio is not only a far more useful exercise than attempting to predict what Chairman Warsh, or Mr. Market, will do next – but also something that is actually within your control. 

As always, we are here to help you and those you care about. 

Have a wonderful weekend, 

Tim and the team at TEN Capital 

Sources 

1. Federal Reserve. FOMC statement, September 16, 2026 

2. Reuters. Markets steady after Fed raises rates and points to another hike 

3. Associated Press. Wall Street holds steady after the Fed hikes rates 

4. LPL Financial. What History Says About Fed Hikes and Stocks 

5. Barron’s. What Happens to Stocks If the Fed Lifts Rates 

6. Charles Schwab. Take a Hike Rate Hikes and Market Impacts 

7. CNBC via YouTube. Tom Lee on what a Fed hike could mean for stocks 

Data, Just the Data

• Euroarea Industrial Production – fell 0.1% in July but slightly better than expectations for a 0.2% decline. Year-over-year production for the region now sits flat.
• U.S. Retail Sales – rose 1.2% in August for the highest monthly increase in 5 months. Sales at gas stations saw the largest increase at 3.1%
• U.S. Jobless Claims – initial claims fell by a staggering 10,000 last week for a total of 196,000, the second lowest monthly reading in 60 years. Continuing claims also fell by 39,000 to 1,730,000, the lowest level since January 2024.
• U.K. Retail Sales – rose 0.5% in August and beating expectations of 0.2%. On an annual basis retail sales are now up 2.4%