Wall Street is overwhelmingly pricing in a quarter-percentage-point interest rate hike by the Federal Reserve at its meeting this week.
The question is whether Fed Chairman Kevin Warsh will unite with policymakers in favor of hiking rates or holding them steady.
“Kevin Warsh has a conundrum,” Macquarie global macro strategists Thierry Wizman and Gareth Berry wrote in a recent note. They noted that he can either follow the White House’s appeal to not raise rates or “go with the internal flow and accede to the majority’s wishes for a hike.”
“We think the second option is likelier,” the strategists wrote. “Fed Chairs, after all, are there to help build consensus, but then vote with the majority.”
Warsh has been mum about forward guidance. If he votes against a hike, he could become the first Fed chair in modern history to dissent from the majority.
Trump has publicly pushed hard for the Fed to lower rates to bring down borrowing costs, threatening a trade embargo if the central bank doesn’t abide.
The bond market has sent a clear signal that it expects a hike, with the 2-year Treasury touching 4.61% on Friday, more than 1 percentage point above the Fed’s benchmark interest rate target of 3.5% to 3.75%.
“I think the market is really asking for a hike right here,” George Catrambone, DWS Group head of fixed income and head of trading, told Yahoo Finance on Friday.
For now, stocks have held up relatively well despite the move in long-dated bonds. The 10-year Treasury (^TNX) on Friday sat at 4.9%, while equities broke a four-day losing streak as investors raised their bets on a rate hike to nearly 90%.
“The rise in yields itself is not a problem as long as infrastructure is funded,” Wizman and Berry said. “But the rise in yields is a problem if it sinks the stock market, and that deters the large pipeline of AI investment from being realized.”
Wall Street firms have also abruptly moved up their timelines, with analysts at Goldman Sachs and UBS now pricing in a hike at the Fed’s Sept. 15-16 meeting.
“Despite the sharp move higher in yields and oil prices, along with growing market conviction about a Fed policy pivot, equities have remained relatively resilient,” Ulrike Hoffmann-Burchardi, UBS’s chief investment officer of Americas and global head of equities, wrote on Friday.
Against this backdrop, the bull market remains intact, according to Keith Lerner, Truist chief investment officer.
“Every bull market has a dominant theme,” he told Yahoo Finance. “If you believe the bull market is intact, which we do, then I think ultimately money comes back to Tech, and it regains its leadership.”
