Federal Reserve Chair Kevin Warsh emphasized the Fed's commitment to price stability during his recent news conference following the interest rate hike on September 16. While higher interest rates typically drive stock prices lower, historical trends suggest that this isn't always the case, especially during periods of strong economic growth.
The bond market has been the dominant story this year, with rising yields on U.S. Treasury bonds increasing borrowing costs. Inflation remains above the Fed's 2% target, leading to another rate hike in September. Futures traders are now anticipating another rate hike in December.
Warsh's warning highlights the persistence of high inflation, but historical data from Fidelity shows that the S&P 500 has often performed well following rate hikes during strong economic growth. From 1992 to 2026, the S&P 500 tended to rise in the 12 months after rate hikes linked to robust economic indicators.
Despite the potential headwinds from higher interest rates, such as reduced corporate profitability and slower economic growth, the stock market has shown resilience. The Vanguard S&P 500 ETF (VOO) has delivered average annual returns of about 15% over the past 16 years and 13.8% over the past five years, even during the Fed's aggressive rate-hiking cycle in 2022-2023.