Fed Rate Hike to 3.75%-4% Splits Stocks, Oil and Bitcoin

A hike everyone expected, with a message that wasn't fully priced in

On September 16 the Federal Reserve raised its benchmark rate by 25 basis points, to a range of 3.75%-4%. It was the first increase since July 2023, and the Federal Open Market Committee approved it 12-0.1 Rates had been at 3.50%-3.75% since the December 2025 cut, so the move undoes that cut after a nine-month pause.3 Officials gave two reasons: inflation is still above target, and the economy, including the labor market, looks strong enough to absorb tighter money. Chair Kevin Warsh also said Middle East tension played a part.1

The hike itself was close to certain. Markets put the odds above 90% going into the meeting.1 What changed the picture was the forecast for what comes next. In the dot plot, 16 of the 18 officials who submitted projections expect at least one more increase this year, and four of them see room for two.1 The median projection for the end of 2027 rose to 4.1% from 3.6% in June, which removes the cut officials had pencilled in for next year.5

The vote also matters. In July, three officials dissented because they wanted a hike. In September nobody voted against one.5 Investors took the unanimous vote as a sign the committee is united against inflation and prepared themselves for a "higher for longer" stretch.12 Sources disagree on one detail. Most report a 12-0 vote, but one data provider says all 19 policymakers backed the move.6 The gap probably comes from counting non-voting participants. Either way, no one on the committee opposed the hike.

Oil is driving this decision

This hike is unusual because the Fed normally looks through the kind of inflation now pushing prices up: fuel costs from the Iran war plus the lingering effect of tariffs.1 What changed is that officials began weighing the cost of continuing to look through it, especially as the labor market stabilized. They lowered their 2026 unemployment forecast to 4.1%.1 After the meeting, Warsh said the Fed wants to stop the energy shock from spreading into second- and third-round price effects, even though it can't control oil prices directly.13

The oil market explains that concern. Brent's spot price averaged about $114 a barrel in September, $23 more than in August. The jump followed attacks on Middle East energy infrastructure and tankers, including strikes that briefly shut Saudi Arabia's East-West pipeline, a key route around the Strait of Hormuz.21 Brent's daily spot price hit $131 on September 15, the day before the Fed's decision.21 Reported September averages differ by benchmark. Indonesia's energy ministry put ICE Brent futures at about $102 for the month, while Dated Brent averaged nearly $117.22 That gap shows how much the scramble for prompt physical barrels raised near-term prices above futures.

Through the end of September, Brent was up roughly 84% for the year and WTI about 68%. Over the same period the 10-year Treasury yield rose from 4.19% to 5.29%.23 Oil did not ease after the meeting. Brent jumped 5% to about $105 on October 8 after reports that the White House had asked for options for further strikes on Iran, and that move set off selling in both bonds and stocks.27 On October 16, Brent was still near $105, and traffic through Hormuz was running at about 68% of its normal level.28 Hurricane shut-ins in the Gulf of Mexico have added to the supply squeeze.24

The Fed's own forecasts reflect this. Officials now expect headline PCE inflation of 3.7% this year and core of 3.4%, and they don't see inflation returning to target until 2029.1 Since the meeting, the data have supported that caution. Consumer prices rose 3.7% from a year earlier in September as gasoline prices soared.9 Producer prices rose 6.3% year over year.39 Our reading is that the geopolitical premium in oil is now the main variable for monetary policy. Whether the Fed hikes again depends more on events around Hormuz than on any domestic data release.

Stocks: a sell-off on the day, then a rebound

Stocks reacted to the press conference, not the statement. The S&P 500 was up about 0.4% right after the 2:00 p.m. announcement. It gave back the gain while Warsh spoke and closed down 0.45% at 7,551.81.15 The Dow lost 631 points, or 1.2%, and the Nasdaq ended roughly flat.19 Bank shares were among the bigger decliners. Huntington Bancshares fell 5.6% and Citizens Financial 4.8%.19 Some analysts tied the late selling to Warsh calling the hike the removal of "a dose of accommodation". Read literally, that phrase points to several more hikes.20

The decline didn't last. The S&P 500 gained about 2% in the week after the meeting, after falling a similar amount in the weeks before it.17 Strategists split on the outlook. Executives at BMO and Raymond James argued that strong profits and corporate balance sheets leave the fundamentals intact.12 Societe Generale's chief economist said beforehand that markets did not believe the Fed would follow through on tightening and predicted stocks would take a hit later in the year.11 History supports some patience but warns of a dip. Goldman Sachs found the S&P 500's median return about three months after a first hike has been around -4%, recovering to a 9% median gain at twelve months.14 UBS put the average one-year gain after a first hike at 10.8%.12

The more serious risk is coming through the bond market rather than the policy rate. The 10-year yield was just over 5% on the day of the decision.19 Late-September reporting described benchmark yields at their highest since 2007.18 Those levels raise the discount rates used to value long-dated growth companies. That vulnerability showed up on October 14, when the hotter-than-expected September CPI report sent the Nasdaq down 1.88% and the S&P 500 down 1.11%, led by AI hardware, tech and bank stocks.16

Bitcoin held up better than expected

The setup for crypto looked bad. On September 15, the day before the Fed meeting, the CLARITY Act, a crypto market-structure bill, failed a procedural vote in the Senate. Bitcoin opened September 16 at about $75,587, down 3.3% from the previous day.33 Before the meeting, analysts mapped out a $70,000-$73,000 range if the Fed hiked and signaled more tightening, which is close to what happened.35

Bitcoin rose instead. In the seven days after the hike it gained 11.58%, and Ether rose 11.94%.32 By September 23 it had climbed back above $86,000 on strong ETF inflows.38 Analysts offered several explanations: rate futures had priced the hike at about 94%, leveraged sellers had already been forced out, and ETF buying continued. Some researchers go further and argue that Fed decisions matter less to bitcoin since spot ETFs made institutional allocations the main source of demand.36 We find the simpler explanation more convincing. The hike was fully expected, and the market was already heavily sold.

The argument that bitcoin has decoupled from rates is weaker than it sounds. When September producer prices came in at 6.3%, bitcoin dropped to just under $80,000. At the same time, CME FedWatch odds of an October 28 hike briefly jumped from about 22% to nearly 47% before falling back to 26%.39 Bitcoin still reacts to inflation surprises and changes in the rate path. It just didn't react to a hike that markets already expected. The same analysis acknowledges that crude above $100 keeps the case for further hikes alive, and that this is the main way tighter policy hurts bitcoin.36

What to watch before October 28

The minutes released October 7 said most participants expected another increase to be appropriate by year-end but did not say which meeting.5 After the CPI report, markets expect the Fed to skip October and hike in December.9 Futures priced the next step as less likely than the dot plot did: about 87% odds of at least one more hike on September 17, compared with 16 of 18 officials projecting one.3 Pressure from the White House adds another complication. President Trump said he still has confidence in Warsh but wants rates cut to 1% "or less".13

Our reading is that the September hike was not the main event. Since 2023 the Fed has moved from looking through energy-driven inflation to fighting it, and oil, stocks and crypto now take their direction largely from Brent. If Hormuz traffic recovers and crude falls back below $100, a December pause becomes possible and the post-hike rebound in risk assets can continue. If attacks on tankers keep increasing, the 4.1% median looks like a floor rather than a ceiling, and the Goldman pattern of a sell-off two to three months after the first hike points to the turn of the year as the period of greatest risk.