Stock investors have been waiting to hear from the Federal Reserve about the central bank's plans for interest rate policy in the next year or two, and what they found out on Wednesday wasn't good news in their minds. After oscillating in both directions following the 2 p.m. EDT announcement and subsequent press conference, the Dow Jones Industrial Average (^DJI -0.83%), S&P 500 (^GSPC -0.38%), and Nasdaq Composite (^IXIC -0.69%) all started heading lower, with losses ending up just short of 2% on the day.


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Data source: Yahoo! Finance.

The Fed's decision indicated its resolve to put fighting inflation ahead of protecting economic growth, calling the bluff of Wall Street bulls who had hoped that the central bank would turn more dovish as gasoline prices peaked. Perhaps the biggest indication that the stock market now fully expects a recession is the fact that the single stock among the Dow Jones Industrials that posted a rise in stock price today was retail giant Walmart (WMT -0.04%). Read on for a more complete explanation of what the Fed did and how Walmart's gain could be the economy's pain.

Higher rates for longer

Much of what the Federal Reserve chose to do on Wednesday was fully expected. The central bank boosted its Federal Funds rate by three-quarters of a percentage point, setting a new range of 3% to 3.25%. In doing so, it chose not to make the more aggressive full-point move that some economists had started to see as a distinct possibility.

However, what did seem to surprise investors was the resolve with which Fed chair Jerome Powell remained committed to fighting inflation even at the cost of economic growth and a possible recession. Powell acknowledged that high rates will cause economic pain for millions of Americans, with the potential to weaken the labor market and raise borrowing costs for consumers.

Yet as the Fed chair sees it, adding up all that pain still leaves the central bank's aggressive action as a preferable alternative to allowing inflation expectations to become entrenched within the economy. Sacrificing price stability would simply require even more draconian measures in the future, as Powell sees it, making it better to get the difficult work out of the way sooner rather than later.

Fed officials expect further increases to take short-term rates far above the 4% mark. Moreover, it could be two or three years before rates start to fall again.

Walmart's history of recession protection

For students of stock market history, Walmart's 1% gain on Wednesday brought back memories of the Great Recession in 2008 and 2009. During 2008, the S&P 500 fell 37%, with many large-cap stocks falling even more sharply. Yet Walmart stood out as one of the only Dow stocks to post even modest gains during that year.

It's easy to understand Walmart's appeal during tough economic times. Shoppers don't stop needing the things they buy in the retail industry just because money's tight, but they do find ways to economize. One common thing shoppers naturally do is to stop going to more expensive retailers and instead take advantage of lower prices from companies like Walmart. Dollar store retailers have seen similar trends during times of economic stress.

It's premature to call a recession a certainty at this point. However, investors are clearly positioning their portfolios as though the likelihood of a recession was high. That could continue to benefit Walmart even if the rest of the stock market sees steep declines like the ones major indexes suffered Wednesday.