Fed's First Rate Hike in Over Three Years Signals Possible Stock Market Correction

The Motley Fool··USIR·Read original
4▲2 ▼2Impact / 5
Summary · why it matters

The Federal Open Market Committee voted unanimously to raise the target range on the federal funds rate, marking the first rate hike in more than three years, with the vast majority of officials signaling another quarter-point hike in the remaining months of 2026. The decision came despite President Trump's public pressure for lower rates, and his own policies have contributed to the inflationary pressures the Fed is trying to stamp out, most notably sweeping tariffs that added about 0.4 percentage points to core inflation according to research from the Federal Reserve Banks of St. Louis and Minneapolis, and military action in Iran that helped push the price per gallon of regular gasoline up 40% over the past year. History offers a warning: the Fed has initiated three rate-hike cycles in the last 25 years, and following the first hike in each cycle, the S&P 500 dropped by an average of 11% at some point over the next three months, while the Nasdaq Composite declined by an average of 17% over the same periods. Treasury yields have also surged, with the 10-year Treasury bond yielding 5.01% at the close on Friday, Sept. 18, the largest payout since July 2007, and Bank of America's fund manager survey sees rising yields as the single greatest risk to the stock market. The last time the 10-year yield reached that level, the S&P 500 and Nasdaq Composite both suffered bear markets, plunging more than 20% during the next year.

Impact on assets 5

Communication Services▼
Netflix Inc
NFLX
▼ NegativeMonetaryrelevance

Fed rate hike and historical Nasdaq declines after first hikes imply pressure on rate-sensitive growth/tech shares like Netflix.

Artificial Intelligence▼
NVIDIA Corporation
NVDA
▼ NegativeMonetaryrelevance

Rate hike cycle and rising yields pose a macro headwind to high-multiple tech names such as NVIDIA.

Financials▲
Others▲