The Fed decision lands at 2 pm Eastern, with new chairman Kevin Warsh speaking at 2:30 pm. Most of Wall Street expects a hike today. The open question: could he hold instead and surprise the market? That is a fair call, and one worth pleading for.
The market has already done the Fed's work
The bond market has moved on its own. The Treasury curve is steepening from lower to higher maturities. A couple of months ago the 10-year Treasury yield sat near 4.3-4.4%; it has since dropped about 60 basis points. That is 60 basis points of tightening already delivered without the Fed lifting a finger. Given where inflation, growth, and employment data stand, current rates are not actually that low, and there is no pressing need to hike.
Warsh could throw in one hike today and say the Fed will wait for future data - the market could stomach that. The bigger, better move would be to wait one more round of data to see if a hold is possible. But with other central banks around the world hiking and the 10-year steepening, Warsh likely feels he has to fall into line and lift short-term rates.
One reading is bullish: if the hike comes paired with a signal that the Fed is simply unwinding the 75 basis points of easing delivered in 2025, that changes the tone. My take is it helps and hurts. The economy and markets perform best when left to themselves. A Fed coming in to undo what Jerome Powell and company did, plus a government that buys treasuries and hands out money, is artificial. Markets may like those moves at first, but they are the longer-term concern.
Still a long-term bull market
I firmly sit in the long-term bull camp. Markets fixate on the short term, then over the long run things likely turn out fine, as long as the Fed and government spending plans stay under wraps or at least known. Other pressures are in play: geopolitical worries, housing (a drag all through the recovery, now more challenged and more talked about in the media because rates are higher), the November election, and positioning the economy for the end of the Trump term.
This is Warsh's first rate hike. The market shoots first and asks questions later, so it may take the move rougher than it should. But the overall hit from the hike should not be that bad, since the 10-year has already moved so much on its own.
Sectors: winners and the minefield
Energy stays in play because of geopolitical concerns. Consumer staples and utility names are very interest-rate sensitive and have been hammered, along with broad consumer names. Home Depot (HD) is getting smashed. Expedia (EXPE) already took a downgrade. Many names will fall by the wayside if the Fed hikes today. Major brokerage houses are already issuing downgrades, feeding the worry ahead of the decision.
Earnings risk ahead
A strong earnings season just wrapped, good timing, letting companies settle expectations with likely another solid report to come. But higher rates threaten money velocity and money supply. Companies could post a great quarter and then hand out downward forward guidance, citing what is building behind the interest-rate curve. The last couple of years under the Trump administration ran on risk-on borrowing and leverage at relatively low rates - an environment firms grew used to. Now they face tough comps set in that lower-rate, easier-growth world. That gap could hand firms and clients buying opportunities if the market shoots this decision down hard as it adjusts to a new regime.
President Trump signaled a dovish Fed chairman, lower rates, and very easy money supply. Reading between the lines of Fed speak from Warsh and other governors, the message tilts toward fighting inflation first. Given recent CPI, PPI, and core PCE numbers, the Fed looks set to take a staunch stance - meaning likely more hikes, one today and some in the future.
