Rate Hike
Definition
A rate hike is when the Federal Reserve raises its benchmark federal funds rate target, increasing borrowing costs across the economy to slow inflation — it's generally considered bearish for stocks in the near term because it reduces liquidity, increases discount rates, and makes bonds relatively more attractive versus equities.
Example
“The Fed hiked 75 basis points for the third time in a row and signaled more to come. Growth stocks got hammered — high-multiple tech with earnings years away got repriced hardest as the higher discount rate crushed their theoretical valuations.”
Detailed Explanation
Rate hikes are the Fed's primary tool for fighting inflation. By making borrowing more expensive, the Fed aims to slow consumer spending, cool the housing market, reduce corporate investment, and ultimately reduce the demand pressure that drives prices higher. The transmission mechanism takes time — typically 6–18 months before the full economic impact is felt — which is why the Fed often debates whether current hikes are "enough" without certainty about the lagged effects still working through the system.
The stock market impact is multifaceted. Higher rates directly increase the discount rate used to value future cash flows — all else equal, this makes every stock worth less mathematically. Growth stocks (those valued heavily on earnings far in the future) are disproportionately affected because their future cash flows are discounted at a higher rate over a longer period. This is why "growth" sectors like technology and biotech tend to sell off hardest during aggressive rate hike cycles, while "value" sectors like financials (which benefit from wider net interest margins) and energy can hold up better. The expression "TINA" (There Is No Alternative to stocks) reverses during rate hike cycles as bonds start offering meaningful yields again, pulling money from equities.
Day traders need to track the "Fed expectations" embedded in futures markets (specifically fed funds futures, visible on the CME FedWatch Tool) to understand what's already priced in. A rate hike that matches expectations moves markets less than one that surprises. The market spends weeks debating "25 bps or 50 bps?" before each meeting — the outcome relative to that consensus is what drives the actual day-of price action. Trading FOMC hike decisions is more about trading the market's expectation gap than the rate decision itself.