Dow Soars, Right on Cue, as Fed Policymakers Meet

Federal Reserve policymakers will wind up their two-day meeting today, and Wall Street is virtually certain that the central bank will raise its key short-term interest rate for the fourth time since June.

So how will stocks react if an increase is already “in the market”?

The Dow Jones industrial average rallied Tuesday, gaining 100.52 points to 11,041.05. And that fits the pattern of the market’s trend the last three times the Fed raised rates.

Measuring the Dow’s net change the day of the last three hikes combined with the day before and the day after each Fed action, the blue-chip index gained ground each time.

On June 30, for example, the central bank boosted the federal funds rate, the key short-term rate among banks, from 4.75% to 5%. The Dow rallied 160 points on June 29, 155 points the day of the increase and 96 points the day after, to 11,066, for a net gain of 411 points.

The three-day net Dow gain at the time of the Aug. 24 Fed increase was 226 points. And the three-day net gain at the time of the Nov. 16 increase was 115 points.

But each of those quarter-point rate increases had been well-telegraphed by the Fed. This time around, it’s a tossup whether the Fed will raise its rate by a quarter-point or by a half-point.

It’s also interesting to note that, despite the stock rallies amid the last three Fed increases, the gains haven’t stuck for the Dow: As the Fed has continued to tighten credit, the blue-chip index today is 25 points below its close of 11,066 on July 1, the day after the central bank’s first rate increase.

The Fed’s Effect on the Dow

Here’s how the Dow Jones industrial average fared the last three times the Federal Reserve raised its key short-term interest rate. Shown are Dow point changes the day of each Fed move, and the changes the day before and the day after each move.

Source: Times research