New Fed Chair's First Report Card: Why Did the Market Freeze When Interest Rates Paused?

Prologue: Wall Street Holding Its Breath, and the Emergence of a New Captain

Imagine this. A new CEO, famous for being very strict, has taken office at your company. On the day of the first executive meeting, all employees are holding their breath and listening closely outside the meeting room doors. “Will they cut our salaries? Or give us a bonus?” Eventually, the door opens and the new CEO says, “I will not cut this month’s salaries right now. However, half of the executives think we should cut them before the end of the year.” What would the employees’ expressions be upon hearing this? Although they avoided an immediate pay cut, they would cancel all after-work dining plans and tightly close their wallets out of anxiety for tomorrow.

Exactly this kind of scenario just unfolded in the global financial markets. Investors on Wall Street, the heart of the U.S. stock market, were intensely nervous, watching only the mouth of the new economic commander. This is because this monetary policy meeting was the historic first Federal Open Market Committee (FOMC) meeting presided over by the new Fed Chair, Kevin Warsh [U.S. Stock Market Close: FOMC Pressures Market by Stimulating Rate Hike Expectations, All Three Major Indices Fall, Nasdaq Down for Second Day, SpaceX Plummets 5% Reversing Gains]. The first report card of what course the new U.S. captain, who holds the world’s purse strings, would choose has finally been revealed.

Why Is This Important?: The Magic of ‘Numbers’ Directly Tied to My Wallet

You might think, “What does the U.S. interest rate meeting have to do with me living in Korea?” However, the numbers decided at the FOMC (the supreme decision-making body that determines the U.S. benchmark interest rate and money flow) are never just a story about another country across the ocean. Like a massive butterfly effect, they cross the Pacific and inflict a direct hit on your daily life.

Simply put, the U.S. benchmark interest rate becomes the ‘absolute standard’ for all interest rates worldwide. If the U.S. raises its interest rates, Korean banks have no choice but to follow suit to prevent foreign capital from draining into the U.S. in search of higher interest. This immediately increases the mortgage interest we have to pay every month and adds to the interest burden of our overdraft accounts. Conversely, companies find it harder to borrow money from banks, so they stop hiring new employees and halt business expansion. In other words, the U.S. interest rate decision is the ‘weather forecast for my wallet’ that directly affects my salary negotiations for next year and next month’s credit card bills.

The reason new Chair Kevin Warsh’s debut was so important is that it was the first yardstick to confirm whether the Fed would quietly continue its existing policies or apply a completely new shock therapy. And the result brought a deep sigh to investors rather than a sense of relief.

Easy to Understand 1: Rate Freeze, the Brakes on a Giant Truck

Let’s compare this situation like this. You are sitting in the driver’s seat of a massive cargo truck barreling down a steep slope. Here, the truck’s terrifying speed is ‘prices (inflation)’, and the brake pedal under your foot is the ‘benchmark interest rate’. Because prices had been skyrocketing so terrifyingly, the Fed had been slamming hard on the brakes (high interest rates). Thanks to this, the speed has decreased slightly, but the truck is still rattling unstably down the road.

If you take your foot off the brake here (interest rate cut), the truck is highly likely to race at an uncontrollable speed again, risking the accident of soaring inflation. However, if you press the brake even harder than now (interest rate hike), the wheels could lock and the vehicle could flip over, leading to a massive disaster such as an economic recession or large-scale corporate bankruptcies. Therefore, Chair Kevin Warsh and the Fed members decided, “For now, let’s maintain the current brake pressure (3.5%~3.75%) and watch the surrounding situation” [U.S. Stock Market Close: FOMC Pressures Market by Stimulating Rate Hike Expectations, All Three Major Indices Fall, Nasdaq Down for Second Day, SpaceX Plummets 5% Reversing Gains]. Up to this point, it was a result that made all economic experts and market participants nod, saying, “I knew it.”

Easy to Understand 2: The ‘Hawks’ Claws, Tomorrow’s Typhoon Scarier Than Today’s Clear Weather

The real problem erupted after that. If the interest rate was frozen, meaning the status quo was maintained, it would be normal for the stock market to cheer, or at least react calmly. Then why did the New York stock market turn pale and plummet?

The reason was the future forecast chart containing the ‘inner thoughts’ of the Fed members. A staggering half of the Fed members who attended the meeting brutally stimulated the market’s anxiety by forecasting that they ‘could raise interest rates within this year’ [Warsh Regime’s First FOMC, Rate Freeze… Half of Members Forecast ‘Rate Hike This Year’ [Comprehensive] - Etoday].

Shall we compare it to the weather once again? You are full of expectations to go on an outdoor picnic to the Han River with your family this weekend. Fortunately, the sky this morning is very clear (rate freeze). But when you turn on the news, half of the meteorological forecasters issue a strong warning, saying, “It’s clear right now, but there is a very high probability that a massive typhoon and heavy rain will hit starting this afternoon.” Would anyone hum a tune and spread out a picnic mat just because it’s not raining right now? Naturally, they would cancel all plans and try to hide safely indoors.

The psychology of the financial markets is exactly the same. Investors move by predicting ‘how policies will change in the future’ rather than the interest rate numbers announced right today. The market refers to this threatening atmosphere as an increased probability of a ‘hawkish’ rate hike by the Fed [Warsh Regime’s First FOMC, Rate Freeze… Half of Members Forecast ‘Rate Hike This Year’ [Comprehensive] - Etoday].

For reference, the term ‘Hawks,’ which frequently appears in economic news, compares hardliners who argue that interest rates should be raised and the money supply tightly squeezed to tame inflation to sharp hunting dogs or hawks. Conversely, moderates who suggest lowering interest rates to stimulate the economy are called ‘Doves,’ a symbol of peace. Market participants desperately hoped for warm doves to fly in, but it was confirmed that half of the seats in the meeting room led by Chair Kevin Warsh were occupied by hawks ready to bare their sharp claws at any time.

Current Situation: Tech Stock Rockets Plunging After Taking a Hit From ‘Gravity’

The results of this anxiety were immediate and devastating. Strongly pressured by the fear that interest rates might rise again at any time, that is, the Fed’s hawkish rate hike possibility, all three major indices of the New York stock market closed lower [U.S. Stock Market Close: FOMC Pressures Market by Stimulating Rate Hike Expectations, All Three Major Indices Fall, Nasdaq Down for Second Day, SpaceX Plummets 5% Reversing Gains].

Among them, the places that suffered a particularly painful blow were future-oriented companies like SpaceX, a space exploration company, and the Nasdaq, where innovative tech companies are gathered. The Nasdaq, the U.S. tech-heavy index, extended its decline for a second day, dropping by a massive 1.35% [Warsh Regime’s First FOMC, Rate Freeze… Half of Members Forecast ‘Rate Hike This Year’ [Comprehensive] - Etoday], and SpaceX, an icon of the space industry, also plummeted 5%, spitting out all of its previous gains [U.S. Stock Market Close: FOMC Pressures Market by Stimulating Rate Hike Expectations, All Three Major Indices Fall, Nasdaq Down for Second Day, SpaceX Plummets 5% Reversing Gains].

“Why do innovative high-tech companies specifically react more sensitively to interest rate talks and plummet?”

This situation is easy to understand as follows. Interest rates are like the ‘Gravity’ of physics to the stock market, especially for tech companies dreaming of the future. Traditional manufacturing or essential consumer goods companies, which already have plenty of cash from selling products well, do not desperately depend on bank loans. However, the situation is entirely different for companies like SpaceX, which sends spaceships to Mars, or those developing next-generation artificial intelligence that costs astronomical amounts of money. Rather than making an immediate profit, they are ‘growth stocks’ that pour in massive investments and bank loans to chase the dream of changing the world and making big money in the distant future.

But higher interest rates mean that the interest they have to pay when borrowing money skyrockets. It takes an enormous amount of fuel to launch a giant rocket into space, and it’s like the price of that fuel jumping several times in an instant. Furthermore, from the perspective of investors, they start to think, “If I can get a guaranteed high-interest rate just by safely putting my money in a bank deposit, is there any reason to invest my money in a perilous rocket launch project that might fail?” Ultimately, as the heavy gravity of hawkish interest rate hike forecasts struck the market, the tech stock rockets, which were trying to fly higher than anyone else, could not withstand the weight and plummeted to the ground.

What Happens Next?: Walking on Thin Ice for the Time Being

The first FOMC under the Kevin Warsh regime left a very clear but uncomfortable truth for investors worldwide. It is a powerful, unspoken warning that while they won’t squeeze breath out right now (rate freeze), if the monster of inflation rears its head again, they will swing the hammer without hesitation at any time (forecast of a rate hike within the year).

Wall Street analysts are warning that the market will fluctuate extremely sensitively in time with the upcoming release dates for U.S. job statistics and inflation rates. Until the fear of rising interest rates is completely resolved, it seems the stock market and investors will have to continue an uneasy coexistence, walking on thin ice while nervously reading the mood of the strict economic controller known as the Fed.

MindTickleBytes AI’s Perspective

Chair Kevin Warsh’s first stage was like a perfect textbook showing how ‘psychology’ dominates the giant economy more than the ‘numbers’ themselves. The current benchmark interest rate of 3.5% to 3.75% did not change by a single 0.1 percentage point, but a ghost called the psychological fear that “interest rates could rise in the future” evaporated the massive market capitalizations of the Nasdaq and SpaceX into thin air in just a single day.

This gives us an important lesson on how to view investing and the economy. The market always feeds on the ‘future,’ not the ‘present.’ It clearly demonstrated the fact that no matter how outstanding an innovative tech company may be, it can never be free from the massive gravitational field of the macroeconomy that ultimately determines the value of money. This is why we must listen as closely to every single nuanced word choice of policymakers coming over the threshold of tightly closed meeting room doors in Washington D.C., as we do to companies’ flashy presentations or new product announcements.

Ultimately, studying economics is not simply memorizing difficult terms or numbers, but the process of reading how those numbers stimulate people’s fears and greed and change their behaviors. In a market that will fluctuate like a roller coaster for the time being, it is time for all of us to respond by more carefully examining the flow of the macroeconomic forest so as not to lose our balance.

References

1. [New York Stocks Ahead of FOMC, Mixed Trends Expecting a Rate Freeze

   Hankyung](https://www.hankyung.com/article/202606172997i)

2. [Warsh’s First FOMC… Rate Freeze Certain Due to Inflation Pressures

   Hankyung](https://www.hankyung.com/article/202606172969i)

3. U.S. Stock Market Close: FOMC Pressures Market by Stimulating Rate Hike Expectations, All Three Major Indices Fall, Nasdaq Down for Second Day, SpaceX Plummets 5% Reversing Gains
4. New York Stocks, Mixed Trends Expecting a ‘Hawkish Rate Cut’ from FOMC
5. Warsh Regime’s First FOMC, Rate Freeze… Half of Members Forecast ‘Rate Hike This Year’ [Comprehensive] - Etoday