Wall Street Just Called the Fed’s October Hold a Mistake. Here’s Warren Buffett’s 9-Word Rule From the Last Time the Fed Doubled Rates, and What It Does for $1 Million in an Index Fund Danielle Liverance Thu, November 12, 2026 at 6:52 AM EST 10 min read ^GSPC +1.31% AXP +0.65% BRK-B +0.44% KO +0.59% Explore stocks on Coinbase Trading disclosure Trading disclosure The above button links to Coinbase. Yahoo Finance is not a broker-dealer or investment adviser and does not offer securities or cryptocurrencies for sale or facilitate trading. Coinbase pays us for certain activity generated through this link. Prices displayed are informational.
Bank of America says the Fed's October hold 'is looking like a policy mistake'; Goldman now expects a third hike in March; Waller says a half point 'should be considered' in December. Futures put a quarter point at about 85% to 91% and a half point at about 9% to 11%.
The last four times the Fed tightened after being called late or too soon, the S&P 500 a year later was: 1937 -43.0%, 1994 +2.2%, 2018 +27.7%, 2022 -9.1%. Two up, two down; an average loss of 5.5% that is a 6.9% gain without 1937.
Buffett's letter for 1994, written after the Fed's seven hikes: 'We will continue to ignore political and economic forecasts.' Berkshire enlarged Coca-Cola and American Express that year and grew its net worth 13.9%; 1995 then returned 35.0%.
For a retired couple with $1 million in an index fund and $200,000 in a money market, the four episodes range from a $430,000 loss to a $277,000 gain; selling at the end of 1994 or 2018 would have missed $350,000 or $288,000; the cash covers 4.4 years of draws and earns $500 more a year per quarter-point hike.
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Wall Street spent Wednesday calling the Fed's October decision a mistake, and Warren Buffett's answer to that fear is nine words long: "We will continue to ignore political and economic forecasts." Bank of America's economists wrote that "the October hold is looking like a policy mistake" and that the Fed "seems to be falling behind the curve on inflation," with a rising risk of another increase in January. Goldman Sachs added a third hike, in March, to its forecast. Fed Governor Christopher Waller said in London on Tuesday that if core inflation came in at 0.3% again, "a 50 basis point hike in the policy rate should be considered at the December meeting." Core inflation then came in at 0.3%. Futures traders now put the odds of a quarter-point increase on December 9 at about 85% to 91% and the odds of a half point at about 9% to 11%, up from about 1% before Tuesday's inflation report. The S&P 500 rose 1.2% on Wednesday to 7,626, about 2.5% below its October 6 record.
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A Fed that gets called late and then has to raise rates faster reads as a warning that the next move will be bigger and that stocks will pay for it; the limit of that reading is that the last four times the Fed tightened under the same accusation, the S&P 500 was higher a year later exactly as often as it was lower. That record is below, computed from the Fed's own rate tables, Robert Shiller's monthly S&P 500 data and the daily closes of the biggest S&P 500 fund. Then comes the rule Buffett wrote at the end of the last year the Fed doubled rates, and what both do to a retired couple with $1 million in an index fund.
1937. The Fed doubled bank reserve requirements in three steps, on August 15, 1936, March 1, 1937 and May 1, 1937, to drain what it saw as inflationary slack from a recovery four years old. Chicago Fed president Charles Evans said in 2012 that "such errors happened in 1937 when the Fed prematurely withdrew accommodation." A recession began in May 1937 and ran to June 1938. From March 1937, the S&P 500's monthly average fell 20.6% in six months and 43.0% in twelve, and the index did not get back to its March 1937 level until April 1946, nine years later.
1994. The Fed had held its rate at 3% for 17 months when Alan Greenspan raised it on February 4, 1994. Wall Street said the Fed was late, the bond market had its worst year in decades, and the Fed raised seven times in twelve months, to 6% by February 1, 1995. Stocks shrugged: from February 1994 the S&P 500 was down 1.6% six months later and up 2.2% a year later, and its worst monthly average of 1994 sat only 5.4% below January's. Then 1995 delivered a 35.0% gain.
2018. Jerome Powell said in October 2018 that rates were "a long way from neutral," and the Fed raised for the fourth time that year on December 19, 2018, into a market that had already slid 20.2% from September 20 to Christmas Eve. The Fed made no increases in 2019 and cut three times from August. From that December hike, the S&P 500 fund was up 16.6% six months later and 27.7% a year later.
2022. The Fed had called inflation transitory for most of 2021 and started raising on March 16, 2022, with inflation already far above its target. It raised seven times that year, from near zero to 4.5%. The S&P 500 fund was down 11.5% six months after that first hike and down 9.1% a year after it, inside a bear market that cost 25.4% from January to October 2022. Bonds fell at the same time, so a balanced portfolio had nowhere to hide.
Two of the four were lower a year later, two higher, and three of the four were lower six months in. The average twelve-month change across all four is a loss of 5.5%; leave out 1937 and it is a gain of 6.9%. The disaster was the one where the economy fell into recession, and nobody knew in March 1937 that it would.
Buffett's letter for 1994, written in early 1995 after all seven of those increases, is where the nine words come from: "We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen." He listed what nobody could have foreseen over the prior 30 years, including "treasury bill yields fluctuating between 2.8% and 17.4%," and added: "A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them." During that hiking year Berkshire enlarged its holdings of Coca-Cola, to 100,000,000 shares, and American Express, to 27,759,941 shares, and its net worth grew 13.9%.
The rule has a limit Buffett states himself: it works for money that can wait. His 2013 instruction for his wife's trustee puts 10% in short-term government bonds so the other 90% is never sold in a year like 1937 or 2022.
Take Tom and Ann, a scenario couple of the kind Fisher Investments calls the Tired DIYers. Tom is 66, a retired aerospace engineer; Ann is 64. They hold $1,200,000 in a rollover IRA: $1 million in an S&P 500 index fund and $200,000 in a money market fund paying 3.75%, so stocks are 83% of the account. Social Security brings in $4,400 a month, $52,800 a year, against $98,000 of spending, so they draw $45,200 a year from the IRA, 3.8% of the total. Tom's question this week, and maybe yours, is whether to sell the index fund before the December meeting.
Here is what the four episodes would have done to the $1 million, with no selling. In 1937 it would have been $794,000 after six months and $570,000 after a year, a loss of $430,000. In 1994, $984,000 and then $1,022,000, a gain of $22,000. In 2018, $1,166,000 and then $1,277,000, a gain of $277,000. In 2022, $885,000 and then $909,000, a loss of $91,000. The cash side moves the other way: each quarter-point increase adds about $500 a year to the money market's $7,500, and a half point adds $1,000.
Selling has its own number. A couple who sold at the end of 1994 to wait out the Fed missed $350,000 of gains in 1995 on $1 million; one who sold at the end of 2018 missed $288,000 in 2019. Those two years came right after the hiking years Wall Street called mistakes, and they are why Buffett's rule is about forecasts and says nothing about Fed meetings.
The $200,000 is the part of the plan that answers the 1937 case. It covers 4.4 years of draws, so Tom and Ann would not sell a share of the index fund until mid-2031 even if stocks did what they did in 1937, when the halved $570,000 would otherwise have had to fund the draw at 7.9% a year. Buffett's 90/10 split on the same $1,200,000 would hold $120,000 in bonds, 2.7 years of draws; their 83/17 split is the more cautious of the two. Because the money is inside an IRA, selling and buying back costs nothing in tax, which is why you have to make this decision on the odds, with no tax bill to hide behind.
The rule cannot tell them whether this is 1994 or 1937. The three recent episodes had a Fed that could reverse within a year, and it did in 2019; the 1937 Fed waited until 1938. If a half-point hike in December lands on an economy that is already slowing, the money market fund is the only part of the account that gets paid for it. And 2022 is the warning that the safe side can fall too: their cash sits in a money market fund for that reason, and with the 10-year Treasury near 5%, a short Treasury ladder is a fair alternative for the sleeve.
Wall Street says the Fed made a mistake in October and expects at least one more increase, with about a one-in-ten chance of a half point. The four comparable episodes split two and two a year later, with an average loss of 5.5% that becomes a 6.9% gain without 1937. Buffett's nine-word rule from the last time the Fed doubled rates is to ignore the forecasts, and for Tom and Ann the way to afford that rule is $200,000 in cash covering 4.4 years of draws, worth $500 more a year with every quarter-point hike. The index fund stays.
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