Key Points
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The Fed kept rates steady in its Wednesday meeting, though two members voted to raise them.
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AI stocks, including a popular semiconductor ETF, rose on the news.
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Investors expect the Fed to raise rates at the December meeting, though they could be wrong.
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Fed decision days often spark a major swing in the S&P 500 (SNPINDEX:^SPX), as interest rates play a big role in stock valuations.
However, Wednesday’s announcement, which held the Fed funds rate steady at 3.75%-4%, didn’t do much to move markets. The S&P 500 briefly jumped 30 points or 0.4% when Fed Chair Kevin Warsh took the podium around 2:30 ET. By the end of his press conference, the index had given up those gains, though it moved modestly higher before the closing bell.
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Also notable about the decision was that it was not unanimous, unlike most Fed rate decisions. Ten members of the board voted to raise rates, while Lisa Cook and Beth Hammack voted to raise rates by a quarter of a percentage point. Hammack is a noted Fed hawk who has voted against raising rates before, while this was Cook’s first time voting in opposition.
Those two members didn’t explain their votes, and this session was without the summary of economic projections, or “dot plot” that the central bankers provide to show their long-term view, so investors got little insight into their opinions.
The Fed funds rate, which is the benchmark rate for the economy, is especially meaningful to the AI sector, where some AI infrastructure stocks have tumbled in response to rising interest rates.
Image source: Getty Images.
What the Fed’s vote means for AI stocks
Chip stock investors interpreted the news favorably as the VanEck Semiconductor ETF gained when Warsh began the conference and finished up 1.7%, well ahead of the S&P 500’s gain of 0.3%.
The Fed was widely expected to hold rates steady, though a month ago, Fed futures indicated a more than 50% chance of a rate hike.
Tech stocks and growth stocks tend to be sensitive to interest rates because more of their earnings occur further in the future than those of the average stock, and higher interest rates raise the discount rate in the discounted cash flow analysis, making distant earnings worth less.
AI infrastructure stocks are acutely sensitive to interest rates right now, because many of them are borrowing tens of billions of dollars to fund the new data center build-outs.
CoreWeave (NASDAQ:CRWV), the leading neocloud stock, has become the bellwether for these swings, and it jumped 5.6% in Wednesday’s regular session, showing investors were pleased with the Fed’s decision. Still, investors in CoreWeave and other neocloud stocks will want to pay close attention to Fed decisions and, more broadly, interest rates in the coming months.
Where the Fed goes from here
Warsh has played it close to the vest in his press conferences, but he did make clear that future rate hikes were likely.
Warsh called the decision a “hawkish skip,” implying the Fed will raise rates in the future, and he described the economy as strong, which also opens the door for future hikes.
According to the CME FedWatch tool, investors now see a 78% chance of a rate hike at the December meeting and expect the Fed funds rate to be 4.5%-4.75% or higher a year from now, though the long-term forecast can change a lot between now and then.
For AI stocks, investors can breathe a sigh of relief at the pause, but this storyline is far from over.
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Jeremy Bowman has positions in CoreWeave and VanEck ETF Trust – VanEck Semiconductor ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
