Last night's Federal Reserve's interest rate hike decision was just as the market expected: passed unanimously by 12 to 0, with the dot plot shifting upwards overall. U.S. stocks also responded by turning from rising to falling. However, it's worth noting that the Nasdaq index demonstrated significantly better resilience compared to the S&P 500, with the S&P 500 closing down 0.8%, while the Nasdaq fell only 0.5%. If the market is truly trading on the pessimistic logic that "the rate hike will suppress the economy into recession," sector rotation should have performed exactly the opposite.
Amidst the short-term volatility, besides the rate hike itself, what signal did Chairman Walsh and this decision convey to the market?
1. Dissecting the Rate-Setting Meeting: What Other Insights Did Walsh Reveal Besides the 25 Basis Point Rate Hike?
On September 16, the Federal Reserve announced a 25 basis point hike in interest rates by a unanimous vote of 12 to 0, raising the target range for the federal funds rate to 3.75%–4.00%. This marks the Fed's first rate hike since 2023. In the lead-up, the implied probability of a rate hike in the futures market had already surpassed 90%. Against this backdrop, the Fed had no room to backtrack; if it chose to remain inactive, the market would lose confidence in the Fed's determination to combat inflation and its independence from political interference, leading to a weaker dollar, rising long-term rates, and more challenging macroeconomic scenarios.
Compared to the fact of the rate hike itself, three key details and "subtext" in the statement deserve more contemplation:
Inflation References Are More Hawkish: The statement retained the qualitative description that inflation "remains elevated," and added that it will return to the 2% target "more promptly," shifting the overall tone significantly harder compared to the July meeting.
Change in Attribution of "Supply Shocks": The previous description that attributed inflation to external supply chain shocks was directly removed, and no alternative explanation was provided. This “removal” clearly signifies that the Fed implicitly acknowledges that this round of inflation is not caused by external factors, but rather stems from broader and more persistent pressures on the demand side, thus requiring intervention through tight monetary policy.
Frequent Emphasis on Economic Resilience: The statement notably provided a comprehensive review of the strengths of the U.S. economy, clearly stating that "economic activity is robustly expanding, productivity growth is strong, and capital expenditures are vigorous." On the surface, this serves as a rationale for the rate hike, but the underlying logic serves to alert and reassure the market: the macro fundamentals possess enough capacity to withstand pressure.
In the press conference, Walsh used a clever verb: "Recalibrating" instead of "Braking." This slight difference defines the nature of this tightening as a correction of policy direction, rather than a forced halt to the economic engine.
2. Comparing the Three Previous Rate Hike Paths: Where Will the Market Go After This Rate Hike?
Reviewing the last three rate hike cycles, after a long period of inactivity, the first rate increase typically leads to a consistent pattern for the S&P 500 index: in the short term, it generally faces pain and adjustments due to valuation reconstruction, but as long as economic growth momentum remains and does not slip into a significant recession, it can achieve recovery and regain an upward trend in the medium term.
June 2004 Rate Hike: At that time, the U.S. economy had just emerged from the shadow of the dot-com bubble, establishing a recovery trend with moderate inflation rising. After the first rate hike, the S&P 500 dropped slightly over three months, but climbed over 9% in the following 12 months.
December 2015 Rate Hike Cycle: Then-Chair Janet Yellen initiated the first rate hike in a decade, adopting a very restrained pace of "only one hike a year." Though the S&P dropped about 5% three months later, the volatility was primarily due to global growth fears that year, which had limited correlation to the rate hike itself; 12 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, coinciding with a phase of macroeconomic growth rate peaking and decline. Under these circumstances, various assets experienced severe fluctuations. However, it must be clearly recognized: the damaging effects did not stem from the rate hike actions themselves, but rather from the "steeper-than-expected tightening pace" combined with the "downward economic cycle."
Another important detail is that the panic-driven market decline of 2022 was primarily concentrated in the phase of highest policy uncertainty; it was only after the Fed slowed down its pace of rate hikes and the policy path became clearer by the end of the year that volatility significantly eased, leading to a strong market 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 Fed's dot plot provided quite clear boundaries, indicating that after one more hike this year, it would stop, and this "certainty anchor" itself is an overlooked positive factor for the market.
3. Verification Framework: How to Use Four Core Data Sets to Verify Whether the Growth Narrative Remains Unchanged?
After the rate-setting meeting, what macro tracking framework should we establish to determine if the growth narrative has reversed? The following four key data sets are the best verification tools:
1. Earnings Growth is the Most Solid Fundamental Support: This earnings season recorded the strongest year-over-year earnings per share (EPS) growth since records began, with the degree of upside surprises at historical highs. Earnings are the most direct reflection of nominal GDP, and sustained earnings expansion proves that companies have strong resilience on both sales scale and pricing power.
2. Capital Expenditures Reflect True Cash Investments by Enterprises: The Fed specifically emphasized "vigorous capital expenditures" in their statement, which is not a vague description. If companies foresee a collapse in future demand, the first thing they will cut is typically capital expenditures. The expansion of expenditures verifies the robust demand perceived on the enterprise side, which is certainly not reliant on short-term inventory movements or policy subsidies.
3. Productivity Metrics are Often the Most Overlooked Structural Variables: Strong productivity growth means that inflationary pressures are not entirely driven by costs, but largely stem from improvements in output efficiency. More importantly, rising productivity will also elevate potential GDP growth rates and actual neutral interest rates, which somewhat explains why the current dot plot has raised the long-term neutral rate to 3.25%. In other words, the rise in the rate center is due to improvements in economic fundamentals, rather than the Fed's intent to forcibly tighten the economy; this distinction is precisely the core difference between Walsh's terms "Recalibrating" and "Braking."
4. Employment Structure and Fed's SEP Official Forecasts Need Ongoing Attention: The August employment data significantly exceeded expectations, and the increase in new jobs kept pace with labor supply growth, maintaining a stable unemployment rate. This represents an extremely healthy macroeconomic combination: strong demand, yet not trapped in a "wage-inflation spiral." More convincing is the economic forecast provided by the Fed (SEP): GDP growth projections of 2.3% for 2026 and 2.4% for 2027, with unemployment rates maintained at 4.1% in both years, and a PCE inflation forecast of 3.7% for 2026. The Fed raised rates while also providing a soft landing prediction of "growth not slowing, unemployment not rising." This essentially endorses the resilience of the economy, indicating that rate hikes are not due to fears of an economic collapse, but rather because of overly stellar economic performance.
4. Asset Focus: Key Attention on Technology and Energy
During past rate hike cycles, technology and energy sectors have consistently outperformed the market and are the key focus this time:
Technology Sector: Historical data shows that technology stocks typically exhibit excellent relative returns after the first rate hike and perform well throughout the entire rate hike cycle. This seemingly contradicts intuition—rising rates will boost the discount rates on long-duration assets, which should exert pressure on valuations. However, if the rate hike itself reflects strong economic growth, then robust earnings growth can easily outweigh the rising discount rates. Additionally, this round of performance from tech giants boasts real cash flow and profit realization, not merely reliant on abstract concepts. Last night, the growth style outperformed the value style, and the Nasdaq showed remarkable resilience, serving as evidence. Growth expectations are more critical than rising interest rates, and this is precisely why tech stocks managed to recreate buying opportunities after a brief pullback.
Energy Sector: Energy is the most resilient sector following a first rate hike, often steadily outperforming the market in the subsequent quarter; if economic growth slows, geopolitical risks and supply constraints also make oil prices easier to rise than to fall.
Last night, oil prices experienced short-term drops due to rate hike expectations, but a social media post from Iranian parliamentary speaker Ghalibaf was thought-provoking—he created a "Strait Taylor Rule," embedding the Strait of Hormuz (SOH) and Middle Eastern geopolitical variables within a standard Taylor rule framework, stating: “Rate hikes cannot open the Strait of Hormuz, nor can they produce a barrel of oil. A 25 basis point change does not affect a strategically critical passage... Strait risk premiums, we set them.”
5. Market Regains Confidence in Walsh and the Fed's Independence
Chairman Walsh's hawkish stance has been a consensus in the market, but whether the Fed can truly extricate itself from government control has always been a topic of fierce debate. After this rate hike, the market has once again regained confidence in Walsh's firm hawkishness.
As early as the rate-setting meeting on July 29, the Federal Reserve decided to maintain rates at 3.50%–3.75% with a voting outcome of 9 to 3, marking the fifth consecutive time of inaction, but already three members voted against, advocating for an immediate 25 basis point hike. Although the official statement in July replicated June's wording, following meeting minutes released clear hawkish signals. By September, the voting result transformed directly into a unanimous 12 to 0 decision, with hawkish positions fully commanding the discourse and no dissenting votes from doves.
Within just two months, the focus of internal debates at the Fed shifted dramatically from whether tightening should begin to whether the tightening strength was sufficient. Last night's unanimous decision was not a sudden shift but an inevitable realization following the accumulation of policy logic. Therefore, overly fixating on "how hawkish Walsh is" or on short-term emotional fluctuations has little significance. Walsh's decisive statement, in turn, has restored the market's confidence in the Fed's independence and credibility in combating inflation; as long as inflation is still far from the target, rate hikes are a high-certainty event.
The core question that macro trading truly needs to answer is simply one—whether the momentum for economic growth remains intact. As long as growth momentum is still present, rate hikes merely change the rhythm and amplitude of market restructuring, not the direction of the main trend. The market's concerns about policy rhythm leading to price discounts have in fact created a valuable positioning window for rational long-term investors.
Disclaimer
The views in this article are for informational reference and exchange only, and do not constitute any investment advice, nor do they constitute an offer, solicitation, recommendation, or guarantee for any securities, funds, derivatives, or other financial products.
The data and information referenced in this article are sourced from public channels, and the author has made every effort to ensure accuracy, but does not guarantee completeness, accuracy, or timeliness, either explicitly or implicitly. The relevant views and forecasts are made based on public information available as of the publication date and may be adjusted with changing market conditions without prior notice.
Past performance does not represent future returns, and any market patterns may fail. Investors should independently judge based on their own financial situations, risk tolerance, and investment objectives, and consult qualified professional advisors if necessary. Any investment decisions made based on this article and any resulting gains or losses shall be borne by the investors themselves. The market carries risks, and investments require caution.
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