Fed Chair Kevin Warsh told reporters after the July FOMC meeting that the central bank will not tolerate inflation above its 2% target, and three FOMC officials already pushed for a rate increase at that meeting. Traders now expect a quarter-point hike in September 2026, and history shows major stock indexes have fallen sharply in the months following the first hike of past tightening cycles.
Kevin Warsh closed the door on any retreat from the Federal Reserve's inflation goal during his press conference after the July Federal Open Market Committee meeting. Warsh said: "There is no soft inflation target, there is no soft implicit target", dismissing the idea that officials would accept price growth above 2%.
Three officials already want higher rates
The remark followed a shift inside the FOMC itself. Three of the committee's 12 voting members supported raising rates at the July meeting, up from zero members who wanted a hike in June. Warsh's record backs up the signal: during an earlier term on the Fed's Board of Governors, he was frequently labeled a monetary hawk who favored higher interest rates to curb inflation.
The Fed's own projections point the same way. Nine of the 18 FOMC participants penciled in at least one quarter-point hike for 2026, and six expected two, compared with zero participants forecasting a hike in March. Traders now price a quarter-point increase in September 2026, followed by a second hike in March 2027, according to CME Group's FedWatch tool.
Inflation stays sticky
Behind Warsh's resolve is inflation that remains sticky. PCE inflation, the Fed's preferred gauge, accelerated to 4.1% in May as the Iran conflict disrupted oil shipments through the Strait of Hormuz. It then cooled slightly to 3.7% in June as geopolitical tensions eased. Separately, headline inflation fell from a three-year high of 4.2% in May to 3.5% in June.
FOMC policymakers had expected tariffs to be priced in by year-end, but that changed after the Trump administration announced a new round of tariffs on more than 80 countries last month. Policymakers have also singled out artificial intelligence as a source of inflation, saying the pricing power of AI hardware makers should translate into higher costs for consumers.
History points to trouble after the first hike
If the Fed follows through with a rate hike, history suggests a new increase could weigh heavily on stocks. The S&P 500 and Nasdaq Composite have fallen an average of 10% and 12%, respectively, in the three months after the first hike of a tightening cycle, based on the five hiking cycles of the last three decades. The steepest drawdowns came after the March 2022 hike, when the S&P 500 dropped 17% and the Nasdaq fell 22% in the following months.
Both indexes have kept climbing regardless: the S&P 500 has gained 13% year to date and the Nasdaq Composite has added 14%, lifted by strong earnings and AI investment. The Fed's last policy move was a rate cut in December 2025, meaning a September hike would mark the start of a new tightening cycle.
Sources: The Motley Fool, The Motley Fool
Trading involves risk.
Risk Disclaimer
