Fed Raises Rates 25 Basis Points for First Time Since 2023, Sparking Sell-Off Then Rebound

The Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, September 16, bringing the target range to 3.75%-4% in its first hike since 2023. The FOMC vote was unanimous, and updated projections signaled the possibility of at least one more increase before year end. Fed funds futures are pricing in roughly 40% odds that rates end December in a range of 4.25%-4.50%.

The announcement triggered an immediate sell-off. The Dow Jones Industrial Average lost more than 630 points, or 1.2%, dragged lower by financial services names, while the S&P 500 fell 0.5% and the Nasdaq Composite ended marginally lower. Short-term Treasury yields spiked, with the 2-year yield jumping more than 7 basis points to 4.736%, and the 10-year yield moved back above 5%.

By Thursday morning, futures markets had reversed course. Dow futures advanced 379 points, or 0.7%, S&P 500 futures gained 0.8%, and Nasdaq-100 futures rose 1.1%, as investors treated the hike as resolving a prolonged period of uncertainty. A pullback in oil prices aided the rebound, with U.S. crude falling more than 1.5% to near $100 per barrel and Brent sliding more than 2% to $103.48.

Attention now turns to the Bank of England, which is widely expected to hold rates at its Thursday meeting despite inflation running well above its 2% target. That would mark a divergence from major peers: the European Central Bank delivered its second hike of the year last week, and the Bank of Japan is expected to raise its key rate at the conclusion of its two-day meeting on Friday.