Warsh Fed may tolerate non-systemic market declines
The guest argued that a Federal Reserve led by Kevin Warsh would have a much higher pain threshold for organic stock market declines, intervening only in the event of systemic credit crises.
The argument
If the stock market declines due to valuation normalization or individual earnings misses, the Fed is unlikely to cut rates or intervene. However, if the decline is triggered by a systemic event, such as a private credit fund collapse that threatens to metastasize, the reaction function would be swift.
The thesis, stress-tested
✓ What validates it
- ✓Fed holding rates steady despite a 10% equity market correction
- ✓Immediate liquidity injection following a private credit default
▸ Risks discussed
- ▸Political pressure during an election year forcing rate cuts
- ▸An unexpected inflation spike preventing the Fed from intervening even in a systemic crisis
Hear it yourself
"But my point is and always has been, what was a high rate in 1970 is absolutely irrelevant today because if you borrowed at zero in 2019 and your borrowing cost, you're now rolling that paper at four, a lot of companies simply cannot do that. Now that's obviously a a, not a real life example, but Yeah. Junk rated companies were borrowing at four pre fed rate hikes, and their borrowing costs are now north of seven, on average. So you've got companies that were borrowing at four that are paying 10, and you've got companies that are paying six. But whatever, it's been a substantial increase."
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