When a central bank raises interest rates, the first instinct may be that stocks should fall. Higher rates make financing more expensive, increase bond yields and can slow economic activity. However, the Federal Reserve’s September decision showed why financial markets do not operate according to such a simple rule. The Fed raised rates by 25 basis points to 3.75–4.00%, yet the S&P 500 rose after the announcement and U.S. Treasury yields declined. The key to understanding this reaction lies in market expectations.
The price of a stock, bond or currency does not reflect only information that is already known. Investors are constantly trying to estimate what will happen in the future and gradually incorporate these expectations into prices.
Ahead of the Fed’s September meeting, the market was assigning more than a 90% probability to a 25-basis-point rate hike. The move itself, therefore, did not represent a major surprise for investors.
If a large part of the market has been expecting the same decision for several days or weeks, investors may adjust their portfolios before the official announcement. Stocks may fall, bond yields may rise, or the U.S. dollar may strengthen even before the central bank meets.
By the time the Fed ultimately announces the expected decision, there may be little new information left for markets to price in.
This phenomenon is referred to as being priced in, meaning that a particular scenario is already largely reflected in market prices.
Consider two situations.
In the first, the market expects a 25-basis-point rate hike, and the Fed indeed raises rates by 25 basis points. The decision is restrictive, but from an investor’s perspective it contains no significant surprise.
In the second situation, the market expects the same 25 basis points, but the Fed raises rates by 50 basis points. It is precisely the difference between expectations and reality that can trigger a more pronounced market reaction.
For an investor, the question is therefore often not:
“Did the Fed raise rates?”
The more important question is:
“Did the Fed do something different from what the market expected?”
Financial markets react primarily to new information. The greater the difference between investor expectations and the actual outcome, the more pronounced the price movement may be.
The September meeting provides a good example. The Fed raised its target range to 3.75–4.00%, while the FOMC vote was unanimous at 12–0. It was also the first rate hike since 2023.
Under normal circumstances, higher interest rates create several headwinds for equities. Companies face higher financing costs, households may reduce consumption, and safer bond investments may begin to offer more attractive yields.
Despite this, the S&P 500 rose following the Fed’s decision.
Such a reaction does not necessarily mean that investors view higher rates positively. Rather, it means that the rate hike itself was not worse than the scenario the market had already been pricing in.
Part of the negative effect may already have been reflected in prices before the meeting.
When analysing Fed meetings, it is therefore not enough to monitor only the change in the interest rate. The market assesses the entire package of new information.
In the September projections, for example, 16 of 18 Fed officials expected at least one additional rate hike during the year, while four saw scope for as many as two further increases. The Fed also raised its 2026 inflation forecasts to 3.7% for headline PCE and 3.4% for core PCE.
On the other hand, it improved its unemployment forecast to 4.1%.
For markets, therefore, what matters is not only where rates are today but also where they are likely to move in the coming months and years.
Investors therefore monitor the so-called dot plot, the Fed’s economic projections and the central bank chair’s press conference. A single sentence about the future path of policy can sometimes have a greater impact than the rate change itself.
At first glance, another market reaction may also appear unusual: U.S. Treasury yields declined after the Fed’s decision.
Again, however, there is no contradiction.
Bond yields move based on investor expectations. If the market had already priced in substantial monetary tightening ahead of the meeting, confirmation of the expected move does not necessarily lead to a further rise in yields.
Ahead of the meeting, the yield on the 10-year Treasury had risen by approximately 25 basis points since Kevin Warsh’s speech in Jackson Hole and was roughly a full percentage point above its February low.
A significant part of the adjustment had therefore already taken place before the official decision.
This is precisely why markets often use the principle:
“Buy the rumour, sell the news.”
Its meaning is not that the market will always move in the opposite direction after a news release. Rather, it reflects the fact that investors often trade an expected event before it actually takes place.
The same principle does not apply only to Fed decisions.
Inflation may rise year-on-year, but if the result is lower than the market expected, stocks may respond positively. A company may report record profits, but its shares may fall if investors had expected an even better result. The economy may create thousands of new jobs, but the market may react negatively if the consensus was significantly higher.
The number itself, therefore, does not provide the full picture.
A professional approach to macroeconomic events works with at least three figures:
previous reading → market expectation → actual result
Only by comparing them can we determine whether the new information represents a positive or negative surprise for the market.
The Fed’s September rate hike clearly illustrates why financial market movements cannot be explained by a simple relationship such as “higher rates = lower stock prices”.
Markets are forward-looking. Investors therefore begin reacting long before the Fed, a government or a company announces an official decision.
When the announcement finally arrives, what matters may no longer be what happened, but primarily how far the outcome differed from what had already been priced in.
For an investor or trader, it is therefore useful to monitor not only the final figure for every major macroeconomic event but also the market consensus and expectations for future developments. The difference between expectations and reality is often what actually moves prices.
U.S. macroeconomic data released on September 3 showed stronger activity in the services sector alongside persistently weak hiring. Companies are laying off few workers, new orders are rising sharply, yet employment in services continues to contract. At the same time, firms are reporting the strongest input price pressures in nearly four years. For monetary policy, the key issue is therefore the divergence between demand, employment and prices.
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