Fed hikes, signals another, stocks slide

The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point to a range of 3.75% to 4.00%, its first increase since July 2023, and the vote was unanimous at 12 to 0. Stocks were slightly higher going into the 2pm announcement and sold off through the afternoon. The Dow Jones Industrial Average closed down 1.40% at 51,363.01, the S&P 500 fell 0.76% to 7,527.80, and the Nasdaq Composite lost 0.41% to 25,875.21.

The hike was not the surprise. Futures markets had priced the odds above 90% going in, which is another way of saying investors had already adjusted what they were willing to pay for stocks to account for it. What actually moved the market was what came with the decision.

Alongside the rate move the Fed published its Summary of Economic Projections, the quarterly document in which each official marks where they expect rates to sit in the years ahead. It pointed to one more increase before the end of this year and another in 2027. At the press conference, Chair Kevin Warsh said inflation is too high and has been for too long, and that the committee's predominant focus is now the price stability side of its mandate, meaning it is more worried about rising prices than about protecting employment. Investors had been positioned for a single defensive hike followed by a long pause. They were handed a path instead.

That matters to stock prices through two channels. Higher borrowing costs eat into company profits, because most businesses fund inventory, equipment and expansion with debt that reprices upward. And higher rates make safe alternatives more attractive, because a Treasury bond paying close to 5% with no risk of loss forces investors to demand a steeper discount before buying a share of stock instead. The Dow fell hardest because it leans toward banks, industrials and consumer companies whose earnings depend most directly on people and businesses borrowing and spending. J.B. Hunt, the trucking company, dropped 12.6% after warning on rising operating costs, a reminder that the squeeze is already showing up in real businesses.

One detail cut the other way and helps explain the Fed's confidence. August retail sales rose 1.2% on the month against forecasts near 0.9%, so American consumers are still spending, which tells the Fed the economy can absorb a higher rate without breaking.