Warsh leads FOMC to 25bp hike, history suggests S&P 500 gains

Federal Reserve Chair Kevin Warsh and the Federal Open Market Committee raised the federal funds target rate by 25 basis points to a range of 3.75% to 4.00% on Sept. 16. This marks the first interest rate increase since July 2023, a move that initially spooked Wall Street, with the Dow Jones Industrial Average falling more than 1% and the S&P 500 and Nasdaq Composite edging lower.

Warsh's decision follows his hawkish tenure on the Federal Reserve Board of Governors from Feb. 24, 2006, to March 31, 2011. In comments after the Sept. 16 meeting, the Fed chair stated that inflation remains elevated and that the policy action would support a timelier return to the Committee's 2% goal. This stance aligns with his Aug. 28 speech at Jackson Hole, where he emphasized that inflation must move toward the FOMC's objective clearly and at sufficient speed.

The central bank's quarterly Summary of Economic Projections, or dot plot, forecasts another quarter-point hike to the federal funds target rate before the end of the year. This trajectory poses challenges for the artificial intelligence infrastructure build-out, where some capital is financed with debt. Rising borrowing costs could slow this expansion, which is particularly significant as equity valuations reached their second-highest level since January 1871 based on the Shiller Price-to-Earnings Ratio at the start of 2026.

Despite these headwinds, Carson Group Chief Market Strategist Ryan Detrick analyzed historical data from Carson Investment Research and FactSet to assess market performance following rate-hiking cycles since 1990. Detrick noted that while a 50-basis-point increase in March 2022 led to a 10.1% drop in the S&P 500 one year later, standard 25-basis-point initial hikes tell a different story. Over the last 36 years, the S&P 500 was lower 100% of the time one month after an initial quarter-point hike but higher 100% of the time at the 12-month mark by an average of 12.5%.

The current economic environment supports this historical pattern, characterized by low unemployment, reasonably strong consumer spending, and significant capital investment in AI infrastructure. While stock valuations remain a concern, the data suggests that stocks are expected to rise over the next 12 months following this standard rate hike.