The stock market could do something strange this week after the Fed decision

Key Points:

• The Federal Reserve is widely expected to raise interest rates this week, with a 90% probability of an increase to 3.75%-4.00%, following strong inflation data and rising oil prices.
• Unusually, the stock market may rally despite the rate hike, as investors focus on the Fed's signaling and its potential to anchor long-term bond yields, which could benefit equities.
• Market reaction will depend heavily on Fed Chair Kevin Warsh's tone at the press conference, with a hawkish stance likely to push short-term yields higher and a dovish tone potentially causing confusion and higher long-term yields.
• Historically, initial rate hikes tend to cause short-term stock market declines, but if the Fed successfully restores confidence in its inflation-fighting commitment, bond market pressure could ease, supporting stock gains.
• Analysts suggest that much of the bond yield normalization has already occurred, possibly allowing equities to recover and advance through the end of the year if inflation remains controlled.