Kevin Warsh has the entire economic world watching him today. As the new Chair of the Federal Reserve, he will announce the FOMC’s interest rate decision today at 2:00 p.m. EDT. This is a pivotal call, with Warsh caught between conflicting, powerful forces: President Trump has threatened major economic disruption if the Fed does not cut rates, economists are largely advocating for a hold, and markets have heavily priced in a 25-basis-point hike. Above all, Warsh’s priority must be institutional independence—tuning out political and external noise to follow the incoming data.
The Reaction Playbook
Last week’s August CPI report was a nail-biter, ultimately printing cooler than anticipated and sparking a sharp market relief rally ("face ripper"). The central question now: how do equities respond to today's decision?
Here is our playbook:
Fed hikes 25 bps (Consensus): We expect a modest relief rally of 0.5% to 1.0%. Markets despise uncertainty; removing the question mark lets equities bounce.
Fed holds (Non-consensus): The rally would likely be even sharper. As a dovish surprise, a hold could trigger another massive leg up across equity benchmarks.
Why could stocks rally through a rate hike?
Priced in by the bond market: Fed funds futures and bond markets currently reflect a 91% probability of a 25-basis-point increase, while prediction markets sit near 88%. The hike is almost fully discounted; a quarter-point bump alone does not break equity valuations.
Broad consensus: 16 of 20 surveyed top economists anticipate a hike. The outlier expecting a cut this year remains Jeffrey, meaning nearly all institutional forecasters recognize ongoing inflation stickiness.
The Case for a Hold
Goldman Sachs argues that the Fed is leaning toward a hike not because the underlying economy requires it, but because expectations demand it. Significant noise distorts core PCE:
Transitory noise: Temporary factors account for an estimated 1.75 percentage points of core PCE. Stripping those out places underlying inflation near the 2% mandate.
Policy lag: Rate changes take 6 to 12 months to filter through the real economy. Even without further tightening, core PCE is projected to decelerate by roughly 100 basis points over the next six months.
Energy lag: Markets have not yet absorbed the full pass-through effect of recent energy price volatility. Acting prematurely before that shock works its way through data risks overtightening, offering Warsh a credible case to pause.
Bonds and the "Wall of Worry"
Equities still face headwinds from fixed income. This morning, the 10-Year Treasury yield is hovering around 5.0% after touching levels not seen since July 2007. For equity investors, this matters for three reasons:
The baseline discount rate: The 10-Year yield serves as the standard risk-free rate ($R_f$) in valuation models.
Present value compression: A higher discount rate sharply curbs the present value of future corporate earnings.
Long-duration vulnerability: High-multiple growth names, unprofitable tech, and SaaS companies suffer the sharpest multiple compression when yields hover at multi-decade highs.
Broader market valuations have moderated meaningfully. Volatility, or a post-decision pullback offers attractive entry points, as market rebounds in pause-or-pivot cycles tend to materialize quickly.
Bottom line: While today's decision, and current yields are creating uncertainty now. The market is fairly priced, and a correction creates an excellent buying opportunity. We invest for the long-game, not to gamble on short-term unknowns.