Why investors can breathe easier after the Fed holds its fire

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Historically, when central banks tighten aggressively into supply shocks, the result is often stagflation: weaker growth; higher unemployment; pressure on corporate profits and inflation that remains stubborn because the original source was never demand-driven. Going into last week’s meeting, I worried the Fed might focus too heavily on headline inflation while underestimating how much tightening had already occurred through markets themselves.

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Then I listened to Warsh’s press conference. And I have to admit, I changed my mind and my overall opinion of the new Fed Chair.

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One of the most important qualities in investing is the willingness to change your view when the facts change. What impressed me was not simply the decision to hold rates steady, but the framework Warsh used to explain it.

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His message appeared directed as much toward Main Street as Wall Street. He repeatedly emphasized that the Fed understands the damage inflation has caused households and remains fully committed to restoring price stability. At the same time, he demonstrated an appreciation for how policy transmits through markets and the real economy.

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What stood out most was his emphasis on understanding the source of inflation rather than mechanically reacting to every data release. That distinction really matters because not every price increase is a sign of excess demand. Some reflect supply disruptions, others stem from major investment cycles, such as the massive spending wave currently underway in artificial intelligence. The challenge for policymakers is determining which forces are temporary, which are structural and which require a monetary response.

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I also came away with the impression that Warsh is attempting to reshape the institution itself. His focus on credibility, accountability and what he called the “big things” suggests a Fed that is more interested in restoring confidence in its mandate than in fine-tuning every short-term market expectation.

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Most importantly, he appeared comfortable with the idea that markets are already responding to the Fed’s message. Financial conditions have tightened, bond yields have adjusted and investors have recalibrated expectations. In other words, markets have heard the Fed loud and clear.

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That may be why Warsh sounded relatively comfortable leaving rates unchanged. He appears to recognize that monetary policy is ultimately measured by its effect on financial conditions and economic behaviour, not by the number of rate hikes delivered at FOMC meetings or locking themselves into some dot plot or forward guidance that could be made irrelevant overnight.

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A few weeks ago, I was worried the Fed was preparing to overdo it and I was skeptical of the uncertainty surrounding its new leadership. After listening to Warsh, I came away with a different impression. Rather than a policymaker eager to prove his inflation-fighting credentials, I heard someone trying to better understand the forces driving the economy before reaching for the interest rate lever, while recognizing when to step back and let markets do some of the work.

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That matters for investors because financial conditions have already tightened considerably and those effects take time to work their way through the economy. With businesses continuing to spend aggressively on artificial intelligence and other growth initiatives, the Fed’s decision to hold rates steady gives markets and policymakers an opportunity to assess whether higher borrowing costs alone are sufficient to cool inflation. The risks have not disappeared, but the likelihood of a Fed-induced slowdown appears lower than it did only a few weeks ago, which supports a more constructive outlook for equities.

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Martin Pelletier, CFA, is the author of Investing Through the Storm and a senior portfolio manager at TriVest Wealth, a team that is part of Wellington-Altus Private Counsel Inc. TriVest provides discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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