The Fed can hike rates and still make stocks happier

This sounds insane until you look at which interest rate actually moved.

The Fed raised its policy rate by 25 basis points to 3.75%–4% on September 16. The S&P 500 initially fell and the 10-year Treasury yield pushed above 5%.

Then the weird part happened.

One day later, the S&P 500 jumped 1.14%.

The Nasdaq jumped 1.69%.

And the 10-year Treasury yield fell back below 5%.

So the Fed just made the overnight borrowing rate more expensive while the longer-term borrowing rate that actually matters for mortgages, corporate financing and equity valuations moved lower.

That is the part people miss.

A rate hike can be bullish for stocks if the market reads the hike as proof the Fed is serious about inflation and the economy is strong enough to handle it.

The Fed’s own projections still show 2.3% GDP growth for 2026 and 4.1% unemployment. At the same time, inflation is projected at 3.7% this year.

That’s a very different message from a Fed hiking because the economy is falling apart.

And now the market has something else to watch.

If Fed credibility helps pull inflation expectations and Treasury yields lower, the Fed can tighten the short end while financial conditions elsewhere become less painful.

That creates a strange setup:

Higher Fed funds rate.
Lower 10-year yield.
Higher stocks.

So maybe the first question after a Fed hike shouldn’t be “Why are they raising rates?”

Watch the 10-year.

If the Fed hikes and the 10-year keeps falling, the market may be telling you the hike is being interpreted as a confidence signal rather than the start of an economic crackdown.