FOMC Rate Decision & The Yield Spike
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.