The Federal Reserve has raised its benchmark interest rate for the first time in more than three years, marking the start of a new tightening cycle.
The move comes despite repeated pressure from President Donald Trump, who publicly demanded lower rates ahead of the Federal Open Market Committee meeting earlier this month.
Trump even threatened trade consequences on social media, writing “Lower the rate or I’ll stop trading with countries with which we have a deficit,” and separately stating the U.S. should have “the lowest interest rate in the world.”
FOMC officials voted unanimously to raise the target range on the federal funds rate, with the vast majority also signaling another quarter-point hike before the end of 2026.
Ironically, economists and researchers argue that Trump’s own policies have contributed to the inflationary environment that made the rate hike necessary in the first place.
Research from the Federal Reserve Banks of St. Louis and Minneapolis indicates that tariffs have added approximately 0.4 percentage points to core inflation.
The price per gallon of regular gasoline has also surged 40% over the past year, driven by disruptions to global oil supplies stemming from the ongoing conflict in the Middle East.
Historically, the beginning of a new rate-hike cycle has been a rough period for equities, with the S&P 500 dropping an average of 11% in the three months following the first hike across the last three cycles.
The Nasdaq Composite fared even worse during those same periods, declining by an average of 17% in the three months after each cycle’s opening rate increase.
Adding to the pressure, U.S. Treasury bond yields have surged sharply in recent weeks, fueled by inflation concerns, national debt worries, and expectations for additional rate hikes going forward.
Heavy corporate borrowing tied to artificial intelligence projects has also competed with Treasuries for investor capital, pushing yields higher and complicating the outlook for stocks.
Fund managers surveyed by Bank of America identified rising yields as the single greatest risk currently facing the stock market, as higher borrowing costs tend to dampen both consumer and business spending.
The 10-year Treasury bond yielded 5.01% at market close on Friday, September 18, its highest level since July 2007, a period that preceded significant bear markets in both the S&P 500 and Nasdaq Composite.
According to Yardeni Research, the S&P 500 has declined in September 55% of the time since 1928, losing an average of 1.1%, making it historically the worst month of the year for U.S. equities.
With rate hikes underway, bond yields at multi-year highs, and seasonal headwinds in play, investors should brace for the possibility of a meaningful stock market drawdown in the weeks ahead.
