Warsh’s Hawkish Hike Signals More Increases, Yet 36-Year History Suggests Stocks May Rise

Fed Chair Kevin Warsh and the FOMC raised the federal funds rate by 25 basis points to 3.75%–4.00%, the first hike since 2023, signaling more increases this year to reach the 2% inflation goal. The move initially spooked stocks, but 36 years of data show that a standard 25bp initial hike in a tightening cycle is typically followed by a higher S&P 500 about a year later, even as valuations remain rich. With AI investment and debt-financed capex, higher borrowing costs could slow growth, so investors should weigh near-term risks against the potential for a continued, albeit cautious, stock rally over the next 12 months.