The Fed Just Hiked Rates for the First Time Since 2023. Here’s Why Markets Shrugged It Off.
Higher interest rates are often seen as negative for stocks. But when the US Federal Reserve raised rates for the first time in more than three years, markets did not react in the way a simple "higher rates = lower stocks" rule might suggest. Here's why.
First, what actually happened?
On 16 September 2026, the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points, to a target range of 3.75%-4.00%. It was the first increase since July 2023, and the vote was unanimous, 12-0.
| Period | Federal funds rate | Direction |
|---|---|---|
| Before Sept 2024 | ~5.25%-5.50% | — |
| Sept 2024 | Cut to 4.25%-4.50% | Easing cycle begins |
| Through 2025 | Held, then cut to 3.50%-3.75% | Further easing |
| Sept 2026 | Raised to 3.75%-4.00% | First hike since 2023 |
So why didn't the market react more negatively?
The concept: markets react to expectations, not just headlines
One of the most important indicators in understanding market reactions is that prices reflect expectations. Markets had already assigned a greater than 90% probability to the September rate hike before the meeting. That meant the decision itself was not a major surprise, hence the nonchalant reaction from the investing public.
There was some intraday volatility as investors assessed the comments from Fed Chair Kevin Warsh. In the end, both the Nasdaq and S&P 500 had posted modest gains while the Dow finished roughly flat illustrating that rate hikes are not automatically negative for stocks.
Market reaction depends on what investors expected, and it wasn't simply about "higher rates" as many see the rate hike as a removal of an outstanding uncertainty.
The reason behind the rate decision also matters. Fed Chair Kevin Warsh pointed to elevated oil prices, amid ongoing geopolitical tensions, as an important source of inflation pressure rather than simply as a response to an overheating domestic economy.
That creates an important distinction when thinking about monetary policy.
| "Growth" Pressure | "Cost-push" Pressure | |
|---|---|---|
| Driven by | Strong demand and a strong economy | Oil or other supply shocks |
| What it usually implies | Demand running ahead of supply | Higher input or energy costs |
| Fed's dilemma | Slow demand without causing unnecessary damage to growth | Contain inflation while growth may already be under pressure |
The same 25-basis-point rate increase can therefore carry a different message depending on why policymakers made the move.
So is this the last hike?
Not necessarily. Updated Fed projections show 16 of 18 policymakers expect at least one more hike before year-end, with the next decision due on 28 October 2026.
But projections are not guaranteed. Future decisions will depend on incoming economic data and how policymakers assess inflation, employment, and growth.
"A second hike this cycle would likely weigh on REIT valuations simply because the first has been widely expected and was already priced in. As for the Ringgit, it hardly budges as many view the Ringgit as still undervalued against the greenback."
What does this mean for Malaysia?
You don't have to trade US stocks for US monetary policy to matter.
There are several channels through which changes in US interest rates can affect Malaysian markets.
Bank Negara Malaysia has held its Overnight Policy Rate at 2.75%. When the gap between US and Malaysian interest rates changes, the relative attractiveness of US-dollar and ringgit assets can also change, which can affect currency movements and capital flows.
REITs and high-dividend Bursa stocks are often considered more sensitive to changes in interest rates. When US risk-free yields rise, the relative attractiveness of a local dividend yield can also be affected.
Three things to look at when a central bank moves rates
Instead of treating every rate hike or cut as automatically positive or negative for stocks, consider three questions:
Is inflation being driven mainly by strong demand, or by supply and energy shocks?
REITs, property and high-yield counters can respond differently to rate changes than exporters or commodity-linked companies.
A decision that markets had already anticipated may have a smaller immediate impact than an unexpected change.
The pattern worth remembering
A rate hike is not automatically bad news for stocks. The market reaction depends on several things: (i) what was expected, (ii) what actually happened, and (iii) what the decision reveals about the economy and the path ahead. The September hike is a useful example. The move was widely anticipated, while the inflation backdrop was also important in understanding the Fed's decision.
For investors following both US and Malaysian markets, the broader lesson is simple:
Don't stop at the headline rate. Look at the reason behind the move, what the market had already priced in, and how it could flow through to different markets and sectors.
This article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Rate decisions and their market impact can change quickly; always verify the latest data and consult a licensed adviser before making investment decisions.
