Last night, the Federal Reserve's interest rate hike decision was exactly as the market expected: a unanimous vote of 12 to 0, with the dot plot shifting overall upwards. The U.S. stock market also reacted by turning from gains to losses. However, it is worth noting that the Nasdaq index showed significantly better resilience compared to the S&P 500, with the S&P 500 down 0.8% while the Nasdaq only fell by 0.5%. If the market is indeed trading on the pessimistic logic that "interest rate hikes will suppress the economy into recession," the performance of sector rotation should ideally be just the opposite.
Beyond the interest rate hike itself, what signals did Chair Waller and this decision convey to the market?
1. Dissecting the Interest Rate Meeting: What other signals did Waller hint at besides the 25 basis point hike?
On September 16th, the Federal Reserve announced a 25 basis point interest rate hike with a unanimous 12 to 0 vote, raising the target range for the federal funds rate to 3.75%–4.00%. This was the Federal Reserve's first rate hike since 2023. Prior to the meeting, the implied probability of a rate hike in the futures market had exceeded 90%. In this context, the Federal Reserve had no way out; if it chose to remain still, the market would lose confidence in the Fed's determination to combat inflation and its independence from political interference, leading to a weakening dollar, rising long-term rates, and capital outflows, which would be an even more challenging macroeconomic scenario.
Compared to the interest rate hike, three key details in the statement with “subtext” are more worthy of examination:
Inflation commentary becomes more hawkish: The statement retained the characterization that inflation is "still elevated" and added the expression "more promptly" returning to the 2% target, marking a significant shift towards a stricter tone compared to the July meeting.
Change in attribution for "supply shocks": The previous characterization of inflation being blamed on external supply chain shocks was removed, and no alternative explanation was provided. This "removal" signal is clear—the Federal Reserve implicitly acknowledges that this round of inflation is not caused by external factors, but rather stems from broader, more persistent pressures on the demand side, hence needing intervention through tightening monetary policy.
Frequent emphasis on economic underlying resilience: The statement unusually provided a comprehensive outline of the strengths of the U.S. economy, clearly stating “economic activity is robustly expanding, productivity is growing strongly, and capital expenditures are vibrant.” On the surface, this seems to offer justification for the rate hike, but the deeper logic is to alert and reassure the market: the macro fundamentals possess enough capacity to withstand pressure.
At the press conference, Waller used a clever verb: "Recalibrating" rather than "Braking." A single word difference defines the essence of this tightening as correcting the policy direction, rather than intentionally halting the economic engine.
2. Comparing the last three rate hike paths: Where will the market head after this hike?
Reviewing the last three rate hike cycles, after a long period of inactivity, the first rate hike typically led to a pattern of consistent behavior in the S&P 500 index: in the short term, it often faced pains from valuation reconfiguration and pullbacks, but as long as the economic growth momentum remained intact and did not enter a substantial recession, mid-term recoveries and a return to an upward trend could be achieved.
June 2004 rate hike: At that time, the U.S. economy had just emerged from the shadow of the internet bubble, confirming a recovery trend, and inflation was gently rising. The S&P 500 fell slightly in the three months following the first rate hike, but increased by more than 9% twelve months later.
December 2015 rate hike cycle: Then-Fed Chair Yellen initiated the first rate hike in a decade, adopting an extremely restrained "only once a year" pace. Although the S&P fell about 5% three months later, that fluctuation was primarily due to global growth fears that year, with limited connection to the rate hike itself; twelve months later, the S&P index achieved a 6.5% return.
March 2022 rate hike cycle: The Federal Reserve adopted the most aggressive tightening pace in 40 years, with the timing coinciding with a peak and deceleration in macroeconomic growth. In this context, various assets experienced violent fluctuations. However, it must be understood that the impact did not stem from the rate hike action itself, but from the dual overlap of "unexpectedly steep tightening pace" and "economic cycle downturn."
Additionally, an important detail is that the panic selling in the market in 2022 was concentrated in the phase of highest policy uncertainty; it wasn't until the end of the year, when the Federal Reserve slowed down its rate hike pace and the policy path became clearer, that volatility significantly eased and the market ushered in a strong rebound. The market has never feared the rate hike itself, but rather the lack of transparency regarding the endpoint of the rate hikes. This time, the Federal Reserve's dot plot provided a quite clear boundary, stating that one more hike this year would be the stop; this "certainty anchor" itself is an overlooked favorable factor by the market.
3. Verification framework: How to pin down the growth narrative remains unchanged through four sets of core data?
After the interest rate meeting, what macro tracking framework do we need to establish to judge whether the growth narrative has reversed? The following four sets of key data are the best validation tools:
1. Earnings growth is the most fundamental support for fundamentals: This earnings season recorded the strongest earnings per share (EPS) growth since data records began, with the surprise magnitude also at historical highs. Earnings are the most direct reflection of nominal GDP, and the continuous expansion of earnings proves that companies have strong resilience on both sales scale and pricing power.
2. Capital expenditures reflect real monetary investment from enterprises: The Federal Reserve specifically emphasized “vibrant capital expenditures” in the statement, which is not a vague expression. If companies predict a collapse in future demand, the first thing they will cut is definitely capital expenditures. The expansion of spending confirms that companies perceive terminal demand as truly abundant, not reliant on short-term inventory turnover or policy subsidies.
3. Productivity metrics are often the most easily overlooked structural variables: Strong growth in productivity signifies that inflation pressure is not solely driven by cost-side increases, but largely originates from enhanced output efficiency. More importantly, rising productivity will simultaneously elevate potential GDP growth and the actual neutral interest rate, which also explains to some extent why the current dot plot raised the long-term neutral interest rate to 3.25%. In other words, the rising interest rate center is due to the underlying improvement of the economy, not the Federal Reserve's intention to tighten the economy forcefully, which is the essential distinction between Waller's "recalibrating" and "braking."
4. Employment structure and the Fed's SEP official forecasts need to be continuously monitored: The August employment data significantly exceeded expectations, and the increase in employment kept pace with labor supply growth, maintaining a stable unemployment rate. This is an extremely healthy macro combination: strong demand, but not yet falling into a "wage-inflation spiral." More compelling is the economic forecasts provided by the Fed (SEP): the GDP growth expectation for 2026 is 2.3%, and for 2027 is 2.4%, with a constant unemployment rate of 4.1% for both years and a PCE inflation of 3.7% for 2026. While the Federal Reserve is raising rates, it is also providing a soft landing forecast of "no slowdown in growth, no increase in unemployment." This is equivalent to the official endorsement of the economy's resilience, with rate hikes not stemming from concerns about an economic collapse, but precisely because the economic performance is too impressive.
4. Asset focus: Concentrated attention on technology and energy
In past rate hike cycles, technology and energy, which can consistently outperform the market, are the focal point that deserves attention this time:
Technology sector: Historical data shows that technology stocks usually exhibit excellent relative returns after the first rate hike and perform prominently throughout the entire rate hike cycle. This contradicts intuition on the surface—rising interest rates would increase the discount rate for long-duration assets, which should put pressure on valuations. However, if the rate hikes themselves reflect strong economic growth, then significant improvements in earnings growth can completely cover the rise in the discount rate on valuations. Furthermore, this round of technology giants' performance shows solid cash flow and profit realization, not merely relying on pure concepts for support. The recent performance on the market where growth style outperformed value style and the Nasdaq showed significant resilience serves as clear evidence. Growth expectations are more crucial than the rate hikes, which is why technology stocks are creating new buying points after experiencing short-term fluctuations.
Energy sector: Energy is the most resilient sector following the first rate hike, often consistently outperforming the market in the subsequent quarter; if economic growth slows, geopolitical risks and supply-side constraints make oil prices prone to increase while being difficult to decline.
Last night, oil prices fell short-term due to interest rate hike expectations, but a social media post by Iranian Parliament Speaker Ghalibaf is thought-provoking—he created a "Strait Taylor Rule," embedding variables of the Strait of Hormuz (SOH) and Middle East situations into the standard Taylor rule framework, stating directly: "The rate hike cannot open the Strait of Hormuz, nor can it produce a barrel of oil. 25 basis points do not affect a strategic chokepoint... the Strait risk premium is set by us."
5. The market regains confidence in Waller and the Federal Reserve's independence
Federal Reserve Chair Waller's hawkish stance has always been a consensus in the market, but whether the Federal Reserve can truly break free from government control has been a constant debate. After this interest rate hike, the market has once again regained confidence in Waller's resolute hawkishness.
As early as the interest rate meeting on July 29, the Federal Reserve decided to keep interest rates unchanged at 3.50%–3.75% with a voting result of 9 to 3, remaining still for the fifth consecutive time, but already three members had cast dissenting votes in favor of directly raising rates by 25 basis points. Although the official statement in July mirrored June's phrasing, the subsequent meeting minutes had already released clear hawkish signals. By September, the voting result evolved directly into a unanimous 12 to 0 approval, with hawks fully in control of the discourse, and not a single dove's dissenting vote appeared.
In just two months, the internal debate within the Federal Reserve shifted quickly from whether to initiate tightening to whether the tightening pace is sufficient. Last night's unanimous decision was not an abrupt shift, but an inevitable realization after the accumulation of policy logic. Therefore, dwelling too much on "how hawkish Waller really is" or focusing on short-term price fluctuations holds little significance. Waller's resolute statement has instead restored the perception of the Federal Reserve's independence and credibility in combating inflation; as long as inflation is still distant from the target, rate hikes are a highly certain event.
The core question that macro trading truly needs to address is singular—whether the momentum of economic growth remains intact. As long as growth momentum persists, rate hikes merely alter the reshaping rhythm and volatility of the market, not the direction of the main trend. Moreover, the market's excessive concerns over policy rhythm yield discounts that create valuable opportunities for rational long-term investors to position themselves.
Disclaimer
The views expressed in this article are for informational reference and exchange purposes only and do not constitute any investment advice, nor do they constitute an offer, solicitation, recommendation, or guarantee for any security, fund, derivatives, or other financial products.
The data and information cited in this article come from public channels, and the author has made every effort to ensure accuracy, but makes no express or implied guarantees regarding its completeness, accuracy, and timeliness. The relevant views and forecasts are based on publicly available information as of the publication date and may be adjusted as market conditions change, without further notice.
Past performance does not guarantee future returns, and any market patterns may fail. Investors should independently make judgments based on their financial situation, risk tolerance, and investment objectives and consult qualified professional advisors if necessary. Any investment decisions made based on this article and the resulting profits or losses shall be borne by the investor. The market has risks, and investments should be made with caution.
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