On Wednesday, September 16, 2026, the Federal Reserve did something investors normally don't celebrate.

It raised interest rates.

The Fed increased its target range for the federal funds rate by a quarter percentage point, from 3.50%–3.75% to 3.75%–4.00%. It was the first rate increase since 2023. The Fed said economic activity was expanding at a solid pace, while inflation remained elevated and above its 2% goal.

Normally, higher interest rates are considered bad news for stocks.

Yet the very next day, U.S. stocks moved sharply higher.

The S&P 500 rose 1.14%, the Nasdaq gained 1.66%, and the Dow Jones rose 0.61% on September 17. At the same time, the 10-year U.S. Treasury yield fell to about 4.93%, while Brent crude declined about 1%.

That creates a question that seems almost contradictory:

If higher interest rates are supposed to hurt stocks, why did stocks go up after the Fed raised rates?

The answer is one of the most important things to understand about financial markets.

Markets don't simply react to what happened.

They react to what happened compared with what investors expected.

And they react to many other things at the same time.

The Simple Rule About Interest Rates and Stocks Is Not Always True

You've probably heard the basic relationship:

Higher interest rates → bad for stocks

Lower interest rates → good for stocks

There is logic behind it.

Higher rates can make borrowing more expensive.

They can raise financing costs for companies.

They can make bonds and other interest-bearing investments more attractive relative to stocks.

And higher interest rates can reduce the present value investors place on future corporate earnings.

All of that is real.

But it does not mean every rate increase automatically sends stocks lower.

The stock market isn't a machine with one input.

It is a giant pricing mechanism where investors constantly compare new information with what they had already expected.

That's why the same rate decision can produce very different reactions at different times.

The Fed's Rate Hike Was Not a Complete Surprise

This is probably the biggest reason Wednesday's decision didn't automatically produce a lasting stock-market selloff.

Investors had been expecting the Fed to raise rates.

A Reuters survey published before the meeting found that 85% of economists expected a quarter-point hike at the September meeting.

So when the Fed actually delivered the quarter-point increase, investors weren't hearing something completely unexpected.

They had already been positioning themselves for it.

This creates a critical distinction:

Expected news

and

Unexpected news

Suppose investors expect a company to earn $1 billion.

The company reports:

$1 billion

The headline sounds positive.

But the stock might barely move because the result was already priced into expectations.

Now suppose the company earns:

$1.3 billion

The reaction could be very different.

The same principle applies to central banks.

A rate hike that investors already expected can produce a very different market reaction from a surprise hike.

Markets Care About the Future More Than the Headline

The Fed's announcement wasn't just:

"We raised rates."

Investors were also studying:

What does the Fed think about inflation?

What does it think about economic growth?

What does it expect unemployment to do?

How high might rates remain?

Will there be more hikes?

Could rates eventually come back down?

This is why the market reaction can sometimes look strange.

Investors aren't only processing today's rate.

They're trying to estimate the path of interest rates over the months and years ahead.

What the Fed's New Projections Say

The Fed's September projections provide an important piece of the puzzle.

Policymakers raised their median projection for real GDP growth in 2026 to 2.3%, up from 2.2% in June.

They projected unemployment at 4.1% at the end of 2026.

But inflation is expected to remain elevated: the median projection for headline PCE inflation is 3.7% for 2026, before falling to 2.3% in 2027 and 2.1% in 2028.

The median projection for the federal funds rate at the end of 2026 is about 4.1%, above the current midpoint of the target range.

So the Fed is not signaling that the economy is collapsing.

It is signaling something more complicated:

The economy is still growing, but inflation remains high enough that monetary policy needs to stay restrictive.

That distinction matters for stocks.

A Rate Hike Can Sometimes Be Interpreted as a Sign of Economic Strength

This sounds strange.

Why would investors like a higher rate?

Because central banks generally have more room to raise rates when economic activity is still strong.

The Fed said on September 16 that economic activity was expanding at a solid pace, domestic spending remained resilient, productivity growth was strong and capital investment was robust. It also said unemployment had changed little.

That's very different from a central bank raising rates because the economy is overheating toward a severe downturn.

Investors therefore had to process two messages simultaneously:

Interest rates are higher.

But also:

The economy isn't showing the kind of weakness that would normally force the Fed to reverse course immediately.

That combination can support parts of the stock market.

Then Something Else Happened: Treasury Yields Fell

This is one of the most important pieces of the story.

On September 17, while the Fed's policy rate was higher, the benchmark 10-year Treasury yield fell to about 4.93%.

That may sound like a contradiction.

It isn't.

The federal funds rate is a very short-term interest rate controlled by the Federal Reserve.

The 10-year Treasury yield is determined by the bond market.

They are related, but they aren't identical.

Investors can push long-term Treasury yields down even while the Fed raises its short-term policy rate.

And that matters because long-term yields influence how investors value many stocks, particularly companies whose expected cash flows are far in the future.

Why Do Lower Long-Term Yields Help Some Stocks?

Imagine an investor has two possibilities.

A relatively safe investment in government bonds.

Or a riskier investment in a technology company whose profits are expected years in the future.

The expected return available from bonds matters when deciding how attractive the stock looks.

When long-term bond yields rise sharply, stocks may have to compete against a more attractive risk-free alternative.

When long-term yields fall, that pressure can ease.

This is particularly important for growth companies because a larger portion of their valuation can depend on profits expected several years into the future.

That's one reason technology shares can react strongly to changes in Treasury yields.

On September 17, the Nasdaq rose 1.66%, outperforming the broader S&P 500's 1.14% gain.

The point isn't that lower bond yields automatically make technology stocks rise.

It's that changing long-term rates are one of the variables investors use when valuing future earnings.

The Fed Can Raise Rates Without Long-Term Yields Rising by the Same Amount

This is one of the biggest misunderstandings in financial markets.

People often imagine:

Fed raises rate → every interest rate goes up equally

That's not how the market works.

There are:

Short-term rates

Long-term Treasury yields

Mortgage rates

Corporate borrowing costs

Credit-card rates

and many other interest rates.

They can move together.

But they can also move in different directions.

In this week's market reaction, the Fed raised its policy rate while the 10-year Treasury yield moved lower the next day.

That helps explain why the stock market did not simply follow the textbook "higher rates = lower stocks" pattern.

Investors Were Also Watching Oil

Oil prices were another major factor.

Brent crude fell about 1% on September 17, according to AP and Reuters.

Why does that matter for stocks?

Because oil affects inflation.

When energy prices rise substantially, businesses can face higher transportation, production and operating costs.

Higher energy prices can also keep consumer inflation elevated.

That can make the Federal Reserve more concerned about persistent price pressures.

So falling oil prices can remove some pressure from the inflation outlook.

And that can matter to markets even when the Fed itself has just raised rates.

The August U.S. CPI report illustrates how important energy has become: gasoline prices rose 3.9% in August, while the overall CPI increased 3.4% from a year earlier and energy prices were up 16.3% year over year.

That means investors have another variable to watch besides the Fed.

Why Falling Oil Prices Can Be Good for Businesses

Think about a company that transports products across the country.

Fuel is a cost.

If fuel becomes cheaper, some of the pressure on that company's operating expenses can ease.

The same general principle can apply to:

Airlines.

Shipping companies.

Manufacturers.

Logistics firms.

Retailers.

Agricultural businesses.

Other energy-intensive industries.

That doesn't mean every company benefits equally.

Oil producers can actually face lower revenues when crude prices fall.

But for many oil-consuming businesses, cheaper energy can improve the cost side of the business.

The Labor Market Also Gave Investors Something to Like

On September 17, the U.S. Labor Department's weekly report showed 196,000 initial unemployment claims, lower than the previous week's 206,000 and below economists' expectations of 207,500. AP reported that this was the lowest level since mid-July.

That's relevant because the Fed has a dual mandate involving price stability and maximum employment.

A labor market that isn't deteriorating rapidly can reduce fears of an immediate economic contraction.

The broader August employment report had also shown:

162,000 payroll gains

and:

4.1% unemployment

for August.

So investors were dealing with an unusual combination:

Inflation remains too high.

The Fed is tightening.

But:

The labor market is not collapsing.

And:

Economic growth projections are still positive.

That can create a more complicated market reaction than simply "rate hike = stocks down."

What Happened on Wednesday?

The story becomes even clearer when you compare Wednesday with Thursday.

After the Fed announced the rate hike on September 16, stocks initially came under pressure.

Reuters reported that the Dow and S&P 500 declined and the dollar strengthened as investors digested the Fed's more hawkish stance.

Then Thursday brought a different market interpretation.

Oil eased.

Long-term Treasury yields declined.

Labor-market data remained firm.

Stocks recovered strongly.

The S&P 500 gained more than 1%.

The Nasdaq gained almost 1.7%.

This is a good example of how markets can change their interpretation from one session to the next as new information arrives.

The Stock Market Isn't Voting "For" or "Against" the Fed

This is another useful way to think about it.

The market doesn't have a single opinion.

There are millions of investors, funds, institutions, algorithms and traders responding to different information.

One investor may think:

"Higher rates are bad for stocks."

Another may think:

"The hike was already expected."

Another may focus on:

"Long-term Treasury yields are falling."

Another may focus on:

"Oil prices are coming down."

Another may be looking at:

"Corporate earnings are still strong."

All of those can influence the market simultaneously.

The final stock-market move reflects the balance of buying and selling based on all those expectations.

The Most Important Word Is "Expected"

This is worth understanding because it explains many seemingly irrational market moves.

Suppose everyone expects:

Bad news.

The market falls before the news is officially released.

Then the actual news arrives.

It is bad—but not as bad as expected.

Stocks rise.

A person watching only the headline might say:

"Why did stocks rise when the news was bad?"

Because the market wasn't comparing the news to perfection.

It was comparing it to expectations.

The same thing can happen with interest rates.

A rate hike can occur while stocks rise if investors had already anticipated the hike and the rest of the information looks better than feared.

"Higher Rates Are Bad for Stocks" Is Too Simple

A more accurate framework is:

Higher rates can create pressure on stock valuations.

But the actual market reaction depends on:

How large the rate increase is

Whether it was expected

What the central bank says about future rates

How bond yields move

What happens to inflation

What happens to economic growth

What happens to corporate earnings

What happens to commodity prices

What happens to investor expectations

That's a much better way to understand markets.

What Happens to Growth Stocks When Rates Rise?

This is where the math gets interesting.

Suppose a company is expected to generate:

$100 million

in cash five years from now.

An investor has to decide what that future money is worth today.

The discount rate used in valuation affects that calculation.

As discount rates rise, future cash flows generally become worth less in today's terms.

That can put more pressure on companies whose valuations depend heavily on distant future growth.

This is one reason rising interest rates can be particularly challenging for high-growth stocks.

But again, the market reaction isn't determined by rates alone.

If the company's expected future earnings rise enough, its stock could still increase.

That's why valuation is never simply:

interest rate = stock price

It's an interaction between rates, expectations, earnings and risk.

Why Falling Yields Can Matter More Than the Fed's Headline Rate

Imagine the Fed raises its overnight policy rate by:

0.25 percentage point

but investors conclude that inflation will eventually fall and the long-term economy remains stable.

They may buy longer-term Treasury bonds.

Bond prices rise.

Their yields fall.

That can reduce one of the important discount-rate pressures facing equities.

So you could end up with:

Fed rate: higher

while:

10-year yield: lower

and:

stocks: higher

All three can happen at the same time.

That's exactly why investors shouldn't watch the federal funds rate in isolation.

Does This Mean the Fed's Rate Hike Doesn't Matter?

Absolutely not.

The rate hike still matters.

Higher short-term rates can raise borrowing costs throughout the economy.

Businesses may face more expensive financing.

Consumers may pay more for some forms of credit.

Savings and money-market yields can change.

Bond prices and yields can adjust.

Currency markets can respond.

Housing and investment decisions can be affected.

And if rates remain high for a long time, the cumulative effect can become much more significant.

The key is simply that one day's stock-market movement doesn't tell the entire economic story.

What Should Investors Watch Now?

After the September Fed decision, several things become particularly important.

Inflation

The Fed's median projection has 2026 PCE inflation at 3.7%, well above its 2% longer-run goal.

If inflation remains stubbornly high, the pressure for restrictive monetary policy could persist.

Long-Term Treasury Yields

The 10-year Treasury market is important because it influences financial conditions far beyond the Fed's overnight rate.

Thursday's decline toward 4.93% was one of the factors supporting the day's stock rally.

Employment

August payrolls increased 162,000 and unemployment remained at 4.1%. Weekly claims were also low.

A weakening labor market could change the Fed's policy calculations.

Oil

Energy prices have become a major inflation variable.

The August CPI report showed energy prices up 16.3% year over year.

A sustained decline in oil could ease inflation pressure.

Corporate Earnings

Ultimately, stocks represent claims on businesses.

Interest rates matter.

But so do:

Revenue.

Profit margins.

Cash flow.

Debt.

Productivity.

Investment.

And future earnings.

What This Means for the Average Person

You don't need to be a professional investor to care about this.

Fed decisions affect the broader cost of money.

They can influence:

Loans

Savings accounts

Bonds

Mortgages

Business financing

Stock valuations

The dollar

Consumer spending

And inflation.

So when you see:

"Fed raises rates, stocks rise"

don't assume the market has stopped making sense.

Usually, the headline is missing the most important part of the story.

The market isn't asking only:

"Did the Fed raise rates?"

It is asking:

"What did this decision tell us about the economy, inflation, future interest rates and corporate profits—and was that better or worse than investors expected?"

That is a much harder question.

And it is the question financial markets are actually trying to answer.

Why the Market Can Rise Even When the News Sounds Negative

This is perhaps the biggest lesson from September 17.

The Fed raised rates.

That sounds negative for stocks.

But at the same time:

Long-term Treasury yields fell.

Oil prices eased.

The labor market remained firm.

The Fed's economic projections still showed growth.

And the rate increase itself had been widely anticipated.

Those factors helped produce a strong rebound in U.S. equities on Thursday.

None of this means stocks must continue rising.

It simply explains why the immediate reaction wasn't the one a simple textbook rule might lead you to expect.

The Bigger Lesson: Markets Trade Expectations, Not Headlines

This is one of the most useful ideas an investor can learn.

A financial headline tells you what happened.

The market cares about:

What happened

minus:

What investors expected to happen.

Then it adds:

What investors now think will happen next.

That's why markets can:

Rise after bad news.

Fall after good news.

Rise after a rate hike.

Fall after a rate cut.

The headline is only the beginning.

The Bottom Line

Stocks rose on September 17 even though the Federal Reserve had raised interest rates the previous day because financial markets respond to expectations and to the entire mix of economic information, not simply to the direction of the Fed's policy rate.

The Fed raised its target range to 3.75%–4.00%, citing persistent inflation while saying economic activity remained solid.

The rate increase itself was widely expected before the meeting, reducing its surprise value.

Then, on September 17, several other developments supported stocks: the 10-year Treasury yield fell toward 4.93%, oil prices eased, and U.S. employment data remained relatively strong. The S&P 500 gained 1.14%, while the Nasdaq gained 1.66%.

The deeper lesson is that "higher rates are bad for stocks" is a useful starting point, but it is not a complete market rule.

Investors also care about:

What was already priced in.

Where long-term bond yields are going.

Whether inflation is getting better or worse.

Whether economic growth is holding up.

What corporate earnings are expected to do.

What the central bank is likely to do next.

So the next time you see a headline saying:

"The Fed raised rates, but stocks rose."

don't assume the market is being irrational.

Look underneath the headline.

The market may be saying something more specific:

The rate hike was already expected.

The economy still looks resilient.

Long-term yields are moving differently from the Fed's overnight rate.

Oil prices are easing.

And the future may look different from the headline you just read.

That is how a market can rise on a day when the simplest version of the story says it should fall.

Sources

Federal Reserve — September 16, 2026 FOMC Statement

The official statement documenting the quarter-point increase to 3.75%–4.00% and the Fed's assessment of economic activity, inflation and employment.

Federal Reserve — September 2026 Summary of Economic Projections

Official projections for GDP growth, unemployment, inflation and the federal funds rate.

Reuters — Tech Leads Wall Street Higher as Oil Eases and Treasury Yields Dip

Reports the September 17 market rebound, including gains in the S&P 500, Nasdaq and Dow, lower Treasury yields and easing oil prices.

Associated Press — How Major U.S. Stock Indexes Fared, September 17, 2026

Reports the day's closing index levels, Treasury yield and oil-price moves.

Bureau of Labor Statistics — August 2026 Employment Situation

Reports 162,000 payroll gains and a 4.1% unemployment rate in August.

Bureau of Labor Statistics — August 2026 Consumer Price Index

Reports 3.4% annual headline CPI inflation, 2.4% core inflation and a 16.3% annual increase in energy prices.

Reuters — September 2026 Fed Rate-Hike Expectations

Provides the pre-meeting survey showing that the September rate increase was broadly anticipated.

Disclaimer

The information published by The Margin Stream is provided for general informational and educational purposes only. It does not constitute personalized investment, financial, tax, legal or other professional advice. Market prices can change rapidly, and historical or current market movements do not guarantee future results.

Muhammad Akif

Founder & Editor

The Margin Stream