The Fed raised rates on September 16. Why markets barely moved

Stocks fell that afternoon, but not by much. The S&P 500 lost 0.45%, and by Thursday morning it had recovered the decline. Our preview of the meeting listed four details to watch on decision day. All four now have an answer, and the first hike in three years moved stocks very little.

What the Fed decided

The statement was short. It said economic activity "is expanding at a solid pace," that productivity growth is strong and capital investment is robust, and that the unemployment rate "has changed little." On prices it said: "Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability."

In July the committee held rates by a 9-3 vote, with all three dissenters wanting a hike. This time nobody dissented in either direction.

Chair Kevin Warsh opened his press conference by repeating a line from his Jackson Hole speech. He said he "would be hard-pressed to describe broad financial conditions as restrictive," and added: "This view was widely shared by the Committee. So we removed a dose of accommodation."

He also gave the committee's read on the latest data. "This summer's inflation readings do not tell me that underlying trends have meaningfully improved," he said. Based on the August CPI and PPI reports, he estimated that the PCE price index rose about 3.6% over the 12 months to August and core PCE about 3.2%.

The four things to watch, scored

The first was the vote. A hike that drew dissents in favour of holding would have shown a committee split the other way. There were none. Warsh said the unanimous vote "shows our resolve to achieve price stability on a timelier basis."

The second was the dots. In June the median official expected the federal funds rate to end 2026 at 3.8%. The new median is 4.1%, which implies one more quarter-point increase at one of the two meetings left this year. Of the 18 participants who submitted a projection, 12 placed their 2026 dot at 4.125%, four placed it at 4.375%, and two expect no further move.

The larger change is in 2027. The June median had the rate falling to 3.6% next year. The September median holds it at 4.1% through the end of 2027, so the cuts officials had pencilled in for next year are gone. The longer-run estimate rose from 3.1% to 3.2%.

Warsh did not submit a projection of his own, as in June. Asked how a "timelier" return to target fits with forecasts that put inflation at 2% only in 2029, he answered: "those aren't my forecasts. Those are the forecasts of my 18 colleagues." He added: "My business is to not give forward guidance."

The third was the inflation forecast. The median for core PCE inflation in 2026 rose from 3.3% to 3.4%. The 2027 median stayed at 2.5%, and 2028 rose from 2.1% to 2.2%. Headline PCE inflation is projected to reach 2.0% in 2029. Officials did not mark up next year's inflation, which suggests they do not yet see the energy shock spreading far into underlying prices.

The growth side of the forecast improved. The median unemployment rate for 2026 fell from 4.3% to 4.1%, and projected GDP growth rose from 2.2% to 2.3%. The committee is forecasting higher rates alongside a stronger economy.

The fourth was how Warsh would describe energy. A CBS reporter pointed out that a quarter-point hike does not reopen the Strait of Hormuz. Warsh replied: "We cannot affect any individual price, whether it be oil prices, whether it be food stuffs at the grocery store. But what we can do, and will do, is ensure that any change in relative prices don't broaden out. Don't have second and third order effects in the economy." That is the second-round framing, which in our preview pointed to more than one move.

How markets reacted

The hike itself was expected. Before the meeting, futures put the odds of a quarter-point increase at close to 90%. According to CNBC, all three major indexes were higher earlier in the session and turned lower during the press conference.

By the close the Dow Jones Industrial Average was down 631.21 points, or 1.21%, at 51,461.90. The S&P 500 fell 0.45% to 7,551.81, and the Nasdaq Composite slipped 0.01% to 25,978.42.

Treasury yields rose at the short end. The two-year yield closed at 4.74%, up from 4.67% the day before. The 10-year closed at 5.01%, which CNBC reported as its highest level since 2007. The three-month bill yielded 4.14%, above the 4.00% top of the new target range, a level consistent with traders expecting another increase.

Futures moved the same way. Yahoo Finance reported that the CME FedWatch Tool showed a 50.9% chance of a second hike at the October meeting, up from 43.5% a day earlier and 17.6% a week earlier.

Inside the index, the day was weaker than the headline. Among S&P 500 constituents in the stocks-llm catalog, the median stock fell 0.64% and 31% rose. Utilities were the only sector with a positive median, at +0.11%, and health care was flat. Technology fell 0.39%, real estate 1.09% and financials 1.76%, with about one financial stock in twenty finishing higher. Energy was the weakest sector, with a median decline of 3.51%.

For scale, the SPY exchange-traded fund, which tracks the S&P 500, closed Wednesday at its lowest level since July 31. That was still 3.1% below its August 13 high, and 3.4% above its close on July 29, the day of the previous Fed decision.

On Thursday morning the move reversed. In morning trading Yahoo Finance showed the S&P 500 up 1.0%, the Nasdaq up 1.5% and the Dow up 0.5%. The 10-year yield had eased to 4.94%, and West Texas Intermediate crude had fallen to about $100 a barrel.

Why the reaction was small

The move was priced in. When futures put the odds near 90%, the surprise can only come from the path ahead. The path did shift, with one more hike this year and no cuts next year, and that is what moved the two-year yield. A single extra quarter point is a modest repricing.

The hike came with an upgrade to the economic forecast. Officials lowered their unemployment forecast and raised their growth forecast in the same document that raised the rate path. Warsh described an economy that "appears to be strengthening," with new hiring, private-sector earnings and business investment all improving.

Warsh also tied part of the rise in long-term yields to strength. Asked what the bond market was telling him, he gave three reasons for higher yields this year: a stronger economy, competition for capital as the largest technology companies raise funding for their investment plans, and geopolitics.

The backdrop still has two weak spots. A 10-year Treasury yield near 5% raises the return investors can earn without owning stocks. Market breadth is thin too. As of Wednesday's close, the stocks-llm market health page showed 50.3% of measured US companies above their 200-day average and 31.5% above their 50-day average, with 9.9% oversold on a 14-day RSI against 1.6% overbought. The index sits within about 3% of its high while fewer than a third of stocks hold their 50-day average.

What comes next

The September CPI report is due on October 14, and the committee meets again on October 27-28. Futures put that meeting near even odds, and the CPI report is the main scheduled input before it.

Warsh declined to guide either way. He said the committee would "have more to say" over the coming weeks and months, and that he was "ill-prepared to pre-judge" the outcome.

Researching the higher-rate backdrop with stocks-llm

stocks-llm returns dated, sourced company lists. A few of them are useful for seeing how individual companies line up after the decision.

The market health page counts, once a night, how many US companies are above their 200-day and 50-day averages, and how many are overbought or oversold. It shows how much of the market is taking part in a move.

The below the 200-day average screen lists the companies in a longer-term downtrend by that fixed rule, with each company's distance from its average.

Asking for utility companies with the highest dividend yield opens a ranked table of utilities, the one sector whose median stock rose on decision day, with each yield's as-of date. Income investors now weigh those yields against a two-year Treasury at 4.74%.

Every figure in those results carries its source and as-of date. None of it is a recommendation.

This article is for information only and is not financial or investment advice. Market prices and probabilities cited are as of the dates stated and change quickly.