The Federal Reserve is widely expected to raise its benchmark rate a quarter point at its September policy update, and strategists say a hawkish tone could help the S&P 500 more than a dovish one did in July. Treasury yields near two-decade highs and a fresh cut to Wall Street's year-end S&P 500 target are raising the stakes for Wednesday's 2 p.m. ET decision.
A Dovish Surprise Backfired in July
The Federal Reserve held rates steady at its July 29 meeting, and markets initially took the decision in stride. But Chairman Kevin Warsh's dovish news conference sent investors for the exits, and the S&P 500 reversed a modest gain into a 1.5% loss that day, sliding to a six-week closing low as the 10-year Treasury yield rose. That reaction is why strategists now argue a hawkish trifecta this week — a hike plus hawkish projections plus Warsh's press conference — is more likely to help the S&P 500 rally by bolstering the Fed's inflation-fighting credibility.
Treasury Yields Near a 2007 High
Since the July meeting, the 10-year Treasury yield has continued climbing, cresting 5% for the first time since 2007. Economists attribute part of the move to solid growth tied to AI investment, but an inflationary surge in oil prices and global financial market shifts have added pressure, with strategist Ed Yardeni citing the recent attack on the Saudi pipeline among the contributing factors. As a result, Ed Yardeni cut his year-end 2026 S&P 500 target to 7,900 from 8,400, a forecast that still implies 4.1% upside from Tuesday's close.
Markets Price In a Hike, Wary of What Follows
Futures markets are pricing in 91% odds of a 25-basis-point rate hike at Wednesday's meeting, with a 77% chance of another quarter-point move before year-end. Fed days have not been kind to stocks this year, however: Bespoke Investment Group noted that the S&P 500 has fallen in each of the past five decision days, averaging a 1.5% drop in those sessions.
HSBC, however, is maintaining its 8,100 year-end S&P 500 target even after forecasting 50 basis points of additional hikes, since rate-hike cycles have historically seen index performance dip initially before recovering within three to six months. The inflation backdrop remains the key variable strategists are watching heading into the rate hike decision.
The S&P 500 rose 0.4% in Wednesday afternoon trading as technology stocks outperformed, lifting the Nasdaq to a 0.7% gain. The 10-year Treasury yield dipped to 4.96% from Tuesday's 4.995%. Crude oil prices declined more than 3% to $102 a barrel.
Sources: Investor's Business Daily, CNBC
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