US Stock Market Falls After Fed Hikes Rates; Dow Crashes 631 Pts, Nasdaq, S&P 500 Drop; Wall Street Outlook

The US stock market reacted negatively to the US Federal Reserve's first rate hike in three years. The FOMC hiked federal fund rates by 25 basis points to 3.75% to 4% for the first time since 2023, due to rising inflation. Following this, the Dow Jones crashed sharply by over 1.2%, while the Nasdaq Composite and S&P 500 indexes also dropped but mildly overnight. On Thursday, on the other hand, US stock futures surged despite the Fed warning of one more rate hike in 2026 as they see inflationary pressure from crude oil prices, which breached the $100 per barrel threshold.

Dow Jones + Nasdaq + S&P 500

Overnight, the Dow Jones Industrial Average index plunged by 631.21 points or 1.21% to close at 51,461.90. While the Nasdaq Composite index dropped by 3.15 points to end at 25,978.42. And the S&P 500 index slipped by 33.92 points or 0.45% to finish at 7,551.81.

As widely expected, the Fed raised its benchmark interest rate by 25 basis points to 3.75%-4% while signaling another rate increase later this year. The central bank is seeking to curb inflationary pressures as oil prices climbed above $100 per barrel. In corporate news, Generac jumped 33% in extended trading after Amazon received warrants to purchase up to $340 million worth of its shares under an agreement for Generac to supply backup power generators to Amazon's data centers, as per Trading Economics.

The FOMC members hiked fed rates by 25 bps points to 3.75% to 4% with favour of 12-0 in votes. This is the first rate hike in 3 years. Fed has also signaled that one more rate hike could be on the table before 2026-end as they grapple with elevated inflation which has worsened by a recent surge in crude oil prices.

The Kevin Warsh-led FOMC has hiked Fed rates for the first time in 3 years. The reason is the inflation. Warsh said, "The plain fact is that inflation is too high and has been for too long." Warsh reiterated that FOMC's predominant focus is on the price stability side of their mandate. However, White House criticized the decision.

US Stock Futures Today

Unlike the indices, US stock futures in the international market witnessed strong buying trend on September 17. In the early hours of Thursday, the Dow Jones futures gained by 322 points or 0.63% to trade at 51,829, while the Nasdaq futures rallied by 191.50 points or 0.66% to trade at 29,156.50. Also, the S&P 500 futures edged higher by 41.75 points or 0.6% to trade at 7,598.25.

According to Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, the Federal Reserve's decision to raise interest rates by 25 basis points was largely anticipated by financial markets. With inflation well above the Fed's 2% target, economic growth resilient and the labor market relatively stable, we believe the Fed needed to demonstrate its commitment to restoring price stability.

"It also felt like financial markets forced the Fed's hand. This is in contrast to the controversial December rate cut, when Fed officials prepared markets for a cut despite persistent inflation. Today's unanimous decision effectively reverses that December move," Sawrikar added.

US Stock Market Outlook Ahead

The more important question for financial markets is what happens to longer-term interest rates. Adding, Sawrikar said, the 10-year Treasury yield has risen approximately 100 basis points from its February lows, including about 50 basis points since July. Some increase was understandable given higher inflation. However, in our view, much of the more recent increase could have been avoided had the Fed raised short-term rates in June or July.

"As we have argued previously, sometimes raising short-term interest rates is precisely what is needed to bring long-term interest rates down. A credible commitment from the Federal Reserve to control inflation should help stabilize, and potentially lower, longer-term Treasury yields," the expert added.

For equity markets, the expert said, "stabilization in longer-term rates would be constructive and allow attention to shift increasingly toward corporate fundamentals and the upcoming third-quarter earnings season."

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