Why Fed Rate Hikes Under Warsh May Not Kill the Bull Market
History suggests rate-hike cycles don't automatically end bull markets, and a Warsh-led Fed may be no exception.
The conventional fear on Wall Street is straightforward: a hawkish Federal Reserve raises interest rates, borrowing costs climb, valuations compress, and the bull market quietly dies. But that narrative, however intuitive, has a troubled relationship with historical data — and the prospect of Kevin Warsh leading the Fed may be an opportunity to revisit it.
Warsh, a former Fed governor known for his inflation-fighting instincts, would likely enter the chairmanship with a credible hawkish signal. Markets, anticipating tighter policy, might initially flinch. Yet the analytical record suggests that equity markets have frequently *gained* ground during rate-hike cycles, particularly when those cycles begin from a position of economic strength and when the Fed communicates clearly. The threat of hikes, in other words, is not the same as the damage from them.
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There is also a subtler dynamic at work. If Warsh were to signal resolve on inflation without immediately acting, that credibility itself could stabilize longer-term inflation expectations — a development that has historically been friendly to risk assets. The market may price in the hawkishness, absorb it, and move on. Equities have a long track record of climbing walls of worry, and a telegraphed rate cycle is arguably less destabilizing than a reactive, surprise-driven one.
The more serious risk to this bull market is likely not rate hikes per se, but the conditions that might force them: a resurgence of inflation that proves genuinely sticky, or a policy misstep that damages the Fed's credibility rather than reinforcing it. Past rate-hike cycles offer a guide here — the ones that ended bull markets tended to be those that ran ahead of or chased an overheating economy into contraction, not those that were orderly and well-anticipated.
For investors, the Warsh scenario is less a reason to panic and more a reason to study history carefully. Continue reading at MarketWatch.com
