By AKEMI KONDO DALVI, CPA/PFS, CFP
Day traders are obsessed with the Federal Reserve Board and more specifically the Fed Funds Rate and related announcements. That’s because day traders speculate on short-term price movements in stocks, hoping to make multiple quick trades during price shifts that result in small gains, rather than investing in a long-term business for value.
Given their quick-twitch nature, day traders are hyper focused on whether the Fed drops or raises interest rates, even by a small amount. Generally speaking, when the Fed raises its target interest rate, the stock market goes down. Therefore, day traders try to beat the trend and sell even quicker, driving the stock market down faster.
Vice versa, when the Fed drops interest rates, the stock market tends to react favorably with gains. Again, traders try to capitalize on this opportunity, buying to drive the market higher, at least temporarily.
The economic theory that drives this volatility is that higher interest rates make borrowing costs higher, which reduces consumer spending, which reduces corporate profits, which reduces the value of stocks in the stock market. On the flip side, lowering interest rates makes money more accessible, which drives spending, which increases corporate profits and their related stock prices.
As such, much of the active trading market waited anxiously to see the Federal Reserve’s reaction to the August 2026 inflation report, which noted the U.S. inflation rate is roughly 3.4%.1 The Federal Reserve Board’s long-standing target inflation rate has been 2%, so the current inflation rate is viewed at onset as unfavorable.
The current inflation rate is noted to be higher due to temporary factors such as tariffs and rising energy prices due to supply chain disruptions (the Iran War). However, neither tariffs nor energy prices tend to be especially rate-sensitive, and therefore raising interest rates to combat movements in these sectors could be viewed as ineffective.2
Interestingly, a study published in the Journal of Finance by economists Ben Bernanke (before he became the Fed chairman) and Kenneth Kuttner found that it isn’t the rate change itself that moves stock prices, but the unanticipated interest rate movement that jolts the stock market.
Their study noted that during Fed decisions between 1989 and 2002, a surprise 25-basis-point rate cut was associated with roughly a 1% jump in broad stock indexes.3 The implication for today’s environment: if a quarter-point hike is already priced in by the market, the actual announcement may move stocks less than a surprise movement by the Fed.
A review of S&P 500 Index performance on and after Fed meeting days found that in the week following a Fed meeting where rates were raised, the index has historically declined by about half a percent on average, with only about 40% of those weeks posting a gain. Meetings where rates were held steady fared better, with the index averaging a positive return and more than half of those weeks in the green.4
Research from Charles Schwab examining nearly 80 years of Fed tightening cycles found that in the longer term, the S&P 500 has historically gained an average of about 18% in the year before the first hike of a cycle, followed by a downturn averaging 12% within six months, and 14% during the first year after the initial rate hike.5
The pace of interest rate tightening mattered a great deal. Slow, gradual rate hike cycles produced milder drawdowns around 12% at the one-year mark, versus fast rate hike increases, which resulted in an approximate 16% decrease. Simply put, markets better tolerated a cautious and transparent Fed movement.6
History has shown us that mean-reversion also often occurs in the index, meaning the market tends to give back short-term overreactions as new data arrives. In other words, an initial negative reaction can often fade and turn positive over time, with the short-term effects generally normalized by the long-term direction of the market.
Therefore, rather than being compelled to trade your investment portfolio in a knee-jerk reaction to Fed Chairman Warsh’s latest statement, consider taking a step back to ensure your portfolio is well positioned to achieve long-term growth that is in line with your risk tolerance and financial goals.
If you could benefit from a consultation with a financial professional, please reach out to your Certified Financial Planner or CPA Personal Financial Specialist (PFS). Whether you are exploring investment strategies, cash flow management, charitable gifting, retirement planning, or new Fed policy changes, we’re here to help you make sense of it all.
1 https://tradingeconomics.com/united-states/inflation-cpi
2 https://www.advisorperspectives.com/articles/2026/09/10/fed-rate-hike-means-us-economy-inflation
3 https://www.nber.org/papers/w10402
4 https://finance.yahoo.com/markets/stocks/articles/stocks-perform-fed-rate-decisions-120011505.html
5 https://www.schwab.com/learn/story/take-hike-rate-hikes-and-market-impacts
6 https://www.atlantis-press.com/article/126013125.pdf
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.