What Wednesday’s hike means, what the Fed signaled about the rest of the year, and what history says happens next.
By William F. Davis, CFP®
What Happened Wednesday
On September 16, the Federal Reserve raised the federal funds rate by a quarter point, to a target range of 3.75% to 4.00%. The vote was unanimous, 12-0. It is the first rate increase since 2023, and it came after a stretch of cuts in 2024 and 2025 that had many people assuming the Fed was done raising rates for good.
Fed Chair Kevin Warsh was blunt about the reasoning. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” he said at his press conference. Oil prices, pushed higher by the conflict with Iran, have added fresh cost pressure on top of inflation that was already running above the Fed’s 2% target.
Why the Fed Moved Now
Three things converged: inflation that has stayed stubbornly elevated, a labor market that has stabilized enough to give the Fed room to act, and a Fed chair who has been telegraphing for weeks that he wasn’t willing to look through the current price pressures. The Committee’s own statement pointed to a labor market outlook that improved slightly, with the unemployment rate projection ticking down to 4.1%, giving officials more confidence that a hike wouldn’t tip the economy into trouble.
What the Fed Signaled About What’s Next
This is the part clients keep asking about, so let’s be specific. The Fed’s updated dot plot, released the same day, showed 16 of 18 officials expect at least one more hike before year-end, with four of them penciling in two more. Only two officials think Wednesday’s move was the last one for 2026.
Looking further out, 2027 is a genuine toss-up inside the Committee: eight officials see another hike, six see rates holding steady, and four see cuts. Translation: the Fed is not signaling a return to the aggressive tightening we saw in 2022. This looks and sounds more like a measured, data-dependent adjustment than the start of a prolonged hiking campaign.
What History Tells Us
This is not the first time the Fed has raised rates, and markets have a track record here worth paying attention to. Going back to 1994, there have been six major tightening cycles. The pattern across nearly all of them is what analysts call “weak, then strong”: stocks tend to wobble for the first three to four months after the first hike, then recover and grind higher. On average, the S&P 500 has gained 6.7% in the 12 months following an initial rate hike, with a median gain of 10.7%.
| Hiking Cycle | First 6 Months | 12-24 Months Later |
| 1994 | Sharp and fast, roughly a 9% pullback | Up about 36% two years out |
| 1997 | Barely paused, rallied straight through | Up about 42% one year out |
| 2004-06 | Slow, telegraphed, 17 quarter-point hikes | Steady gains through the cycle |
| 2015-18 | Gradual, nine hikes spread over three years | Up about 31% two years out |
| 2022-23 | The roughest one, down roughly 21-25% | Recovered and was higher by month 24 |
The exceptions matter. 1997 was a blowout because the dot-com boom overwhelmed any drag from higher rates. 2022 was the outlier on the downside, because the Fed was playing catch-up against 40-year-high inflation and hiked aggressively into an already-fragile market. The lesson from comparing the smooth cycles (2004-06, 2015-18) to the rough ones (1994, 2022) is that pace matters more than the destination. Markets tolerate rate hikes reasonably well when they’re gradual and well-telegraphed. They get rattled when the Fed moves in large, surprising steps.
Based on what the Fed signaled Wednesday, one or two more quarter-point moves spread over the rest of the year and into 2027 looks a lot more like the 2004-06 and 2015-18 pattern than the shock-and-awe hiking of 2022.
How We’re Positioned
Ask us for the exact holdings and weightings, and you’ll get the same answer Wawa gives when you ask for the secret sauce recipe. We like you, but not that much. The specific allocation is the product. It’s why people hire a fiduciary instead of reading a blog post and copying it. Here’s the shape of it, though:
- Fixed income gets more attractive. Higher rates mean better yields on the bonds and cash instruments in our allocations, not just pressure on existing bond prices.
- We stay diversified and evidence-based. Our portfolios are built around asset allocation and low-cost, tax-efficient vehicles, not bets on the next Fed meeting.
- Volatility is not the same as risk to a plan. Short-term wobbles in the first few months of a hiking cycle are normal and, historically, temporary.
- Rebalancing works in our favor here. If growth stocks pull back while rates adjust, that’s an opportunity to rebalance into strength at better prices, not a reason to abandon the plan.
Bottom Line
The Fed hasn’t declared war on the economy, and it hasn’t signaled a repeat of 2022. It made one deliberate move, said more may be coming, and left plenty of daylight for the data to change that path. Our portfolios were built to handle exactly this kind of environment. If you want to talk through what this means for your specific plan, just reach out.
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William F. Davis is a CERTIFIED FINANCIAL PLANNER™ and Managing Partner with Vericrest Private Wealth LLC, a financial advisory firm in Newtown, Pennsylvania.
Vericrest Private Wealth LLC (“Vericrest”) is an SEC registered investment advisory firm. The information provided herein should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or investment advisory service. Past performance is no guarantee of future results, and there is no guarantee that future investments will be profitable. While we believe that third party information provided is accurate, Vericrest does not guarantee or otherwise warrant such information. For more information please contact Vericrest or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov) to review important disclosures about our firm.
