Market Basics · 5 min read
When the Fed Raises Rates: What Markets Did the Previous Times
By George Matis · Regimic ·
On 16 September 2026, the Federal Reserve raised interest rates by 0.25 percentage points to 3.75%–4.00%. It was the first hike since July 2023, and the vote was unanimous, 12–0. Fed Chair Kevin Warsh said inflation has been elevated for too long and that bringing it under control is the main focus.
The next decision is on 28 October. Many investors are asking the same question: when the Fed raises rates, do stocks fall? History gives a more interesting answer than a simple yes or no.
Why interest rates matter for stocks
When rates rise, borrowing becomes more expensive for households and companies. At the same time, bonds and deposits pay more, so stocks face more competition. And companies' future profits are worth less today, which hurts most the companies whose profits are far in the future, such as many technology companies.
But there is another side: the Fed usually raises rates when the economy is strong. And a strong economy supports profits.
What past hiking cycles show
LPL Financial looked at the six rate-hiking cycles since 1994:
- The first months are difficult. On average, S&P 500 returns were negative for the first four months after the first hike, and improved significantly by months five and six.
- The year after is usually positive. Twelve months after the first hike, the average gain was 6.7% and the median 10.7%.
- Hikes alone rarely end a bull market. Trouble came when rising rates coincided with rising recession risk.
An earlier analysis covering eight hiking cycles since 1970 found that stocks returned 23% on average over those periods. But the moves around the hikes were often sharp.
Three times that stood out
1994: the surprise. Starting on 4 February 1994, the Fed doubled rates from 3% to 6% with seven hikes in about a year. The first hike triggered a big sell-off on Wall Street, and the bond and mortgage markets all but melted down. The economy, however, did not fall into recession.
1997: the rally that kept going. After the March 1997 hike, the S&P 500 rose nearly 8% within two months and 42% within a year. A technology-led rally continued through the hiking period.
2022: the hard year. After the first hike in March 2022, the S&P 500 fell over the next two months and stayed below that day's level for more than 12 months, with a drawdown of 25%. The index ended the year down 19.4%, while the energy sector rose 59%. Inflation was at its highest in decades and the Fed raised rates very quickly.
The difference between these three cases was not the hike itself. It was the backdrop: how high inflation was, how fast the Fed moved, and whether the economy could handle it.
What Regimic's data shows
Regimic tracks how markets reacted after every Fed decision since 2015: hikes, cuts and holds. Across 89 decisions with market data:
- The next day, the S&P 500 rose 51.7% of the time, with a median move of +0.03%. In practice, a coin flip.
- 20 sessions later, the index was higher 69.7% of the time, with a median gain of +1.53%.
- The backdrop matters. When the mood before the decision was defensive (risk-off), the S&P 500 was higher 20 sessions later 82.6% of the time (23 decisions). When the mood was neutral, only 53.1% of the time (32 decisions).
These are past reactions, not a probability for next time. But they show something useful: the decision day itself rarely says much, and the market's mood before the decision often says more. You can find all the figures, by asset and by backdrop, on Regimic's Fed decision market reaction page.
Where we are now
The Fed's September projections showed a 4.1% rate at the end of 2026, up from 3.8% in June. That leaves room for one more hike this year. The Fed also raised its 2026 PCE inflation projection to 3.7%.
After September's CPI inflation data showed prices rising 0.6% in the month, the biggest increase in five months, the market raised the odds of a hike on 28 October to 24.9% (CME FedWatch, 15 October). Holding steady remains the base case.
Today's backdrop has elements of both 1994 and 2022: inflation above target, an energy crisis, and the 10-year U.S. Treasury yield at its highest since 2002. At the same time, the economy is growing and the S&P 500 set a new record in October.
What to watch on 28 October
On decision day, a few things are worth following:
- The decision: a hike or a pause? A hike the market does not expect usually makes a bigger impression than an expected one.
- The statement and the press conference: does the Fed signal more hikes ahead, or that it can wait?
- Bond yields: the 10-year yield's reaction often shows how the market read the decision.
- The dollar and technology stocks: they are usually the first to react to changes in rates.
- The next data: October CPI comes out on 10 November and will show whether the pressure continues.
Where Regimic fits
Regimic does not guess what the Fed will decide or how the market will react. But it shows two things that matter more than the decision day: today's market backdrop (risk-on, neutral or risk-off) and how markets reacted the previous times in a similar backdrop.
Regimic's figures cover every Fed decision since 2015 (hikes, cuts and holds). The "mood before the decision" is based on the S&P 500's move over the previous 20 sessions and the VIX level. Past reactions, not a probability. Data as of 21 October 2026.