Wall Street is full of clichés, however, every so often one proves itself through decades of market rallies and declines. “Don’t fight the Fed” is one of those catchphrases. It’s been whispered on trading desks in the heat of selloffs and shouted in conference rooms during bull runs.
The iconic phrase was born from economic booms and financial crises while representing the ever-present tug-of-war between money supply, monetary policy and market psychology.
It’s simple - “Don’t fight the Fed”.
The Federal Reserve was born in 1913, but it wasn’t until three-quarters of a century later had it become clear that when the Fed wanted money to be easy, markets tended to rise, and when it wanted money tight, markets struggled.
The phrase “Don’t fight the Fed” rose to prominence in the late 20th century, it wasn’t a catchy poetic slogan it was crafted from hard observations: stocks swim with the current of liquidity, and the Fed controls the tide.
The 1970s were a lesson in what happens when you underestimate the Fed’s resolve. Inflation was running hot, fueled by oil embargoes and record government spending. By the late 1970’s, Paul Volcker took over as Fed Chair with a single mission, crush inflation.
(Photo: Owen Franken)
Volcker hiked interest rates to unthinkable levels, finally with the Feds Funds Rate (FFR) peaking above 19%. Bonds cratered, stocks collapsed, and the housing market froze. Anyone who stayed long equities, hoping for a quick turnaround, learned what “fighting the Fed” really meant: betting against the most powerful economic force in the country was not a smart decision.
If the 1970s were about pain, the 1990s were about reward. After the early ’90s recession, Fed Chair Alan Greenspan cut rates aggressively, creating a fertile ground for growth. The Fed wasn’t the only driver, but it was a willing partner, keeping credit flowing and risk appetite high. Investors who rode that wave prospered immensely.
In another example, in 2020, as COVID-19 spread globally, the economy shut down almost overnight. Stocks plunged at a historic speed. Thankfully the Fed responded faster than ever before. In a matter of weeks, rates were cut to zero, trillions of dollars in emergency lending programs were unleashed. Almost instantly, despite the pandemic, markets bottomed in late March of 2020 and roared higher for the rest of the year. That pivot was a modern reminder: liquidity matters, and when the Fed turns the spigot back on, investors should pay close attention.
In 2020, betting against a Fed on full throttle was a losing proposition.
Of course, the shifting tides work both ways. In 2022, inflation surged to multi-decade highs, and the Fed launched its most aggressive tightening campaign in decades. As a result, the Feds Funds Rate soared from near zero to over 5% in 16 months. Those who tried to fight the Fed’s hawkish stance with bullish bets faced headwinds in every major asset class. Bonds suffered their worst year in modern history, stocks fell sharply, and speculative assets like cryptocurrencies collapsed. The Fed’s message was simple: financial conditions had to tighten, and the market would not be spared.
Part of what makes “Don’t fight the Fed” so powerful is not just the economic logic it’s the psychology. When the Fed is dovish, optimism spreads and risk-taking increases. When the Fed is hawkish, caution sets in, and liquidity dries up.
The central bank doesn’t just change interest rates; it changes moods.
In the end, “Don’t fight the Fed” is a reminder to respect the largest single force in the U.S. financial system. You don’t have to like The Federal Reserve decisions, agree with its forecasts, or admire its track record. A smart investor is very observant to the Federal Reserve direction.
With the Federal Reserve expected to start a rate cutting campaign today, history has shown that it’s an excellent time to own equities. The team at WT Wealth Management feels monetary policy has been overly restrictive and now the Fed will scramble to catch up. An easing of the Fed Funds Rate would be welcome news for both equity and fixed income investors. Please consult with your financial advisor to design and implement a fully customized plan for your specific financial situation.
The WT Wealth Management Learning Spotlights are designed to inform, inspire, and foster meaningful dialogue between our clients and the WT Wealth Management team. Our goal is to demystify complex economic and investment topics, offering clear, practical insights that connect financial theory to real-world decisions.
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