Markets removed one major source of uncertainty last week (the U.S. and Iran signed a ceasefire agreement, and while there are disputes, the reality is neither side wants to escalate) but gained another, as the Warsh Fed took a more hawkish-than-expected tone.
More importantly, Warsh threatened to dramatically alter the way the Fed conducts monetary policy, and that uncertainty hit markets on Wednesday. Yet as we saw with Iran, while risks of a more hawkish/radically different Fed is a potential medium or longer-term problem for this market, the reality is that, like the Iran War, it’s simply not enough at this point to offset the still-powerful tailwinds pushing this market higher, i.e., AI infrastructure-driven earnings growth and solid economic growth.
It may seem quasi-astonishing that the whole Iran situation didn’t pressure markets more or for longer, but the reality is that when earnings growth and economic growth are above average (and they are), a macroeconomic influence has to be a major negative to offset those positives. And it is entirely possible that, in the coming months, we find out the Fed is embarking on a major rate-hike campaign or doing something else (more balance sheet reduction?) to reduce inflation.
But until AI-driven earnings growth begins to waiver or growth data begins to flash stagnation or recession warnings, then the less-clear Fed outlook will be a headwind (and we should expect more Fed-related volatility), just not one big enough to end this rally.