Aswath Damodaran calls Fed rate debate pointless, says stock market adapts quickly to higher rates

While stock traders continue to speculate whether the US Federal Reserve will raise interest rates this month and what impact it may have on equity markets, ‘Dean of Valuation’ Aswath Damodaran called the debate pointless as fundamentals will determine what the American central bank’s decision will be.

Before Kevin Warsh took charge as the new Fed chief earlier this year, US President Donald Trump had turned up the heat against Warsh's predecessor Jerome Powell for not reducing the rates. He backed Kevin Warsh, expecting him to cut rates after appointment. But Warsh’s recent commentary seems to be hinting at rate hikes. Trump recently called the members of the rate-setting Federal Open Market Committee “clowns”.

While pressure mounts on Warsh to maintain a balance, Damodaran believes there is little that the Fed chief or even the Treasury Secretary Scott Bessent can do. In a long blog post, he noted that the war in Iran, oil prices and worries around a possible recession have all taken turns driving stock prices in 2026, but the talk around interest rates and where they are going has been a constant concern all year.


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“In the last few weeks, interest rate worries have come to the surface again, for three reasons, all related. The first is the rise in long-term US treasury rates to levels not seen in twenty years. The second is US debt exceeding $40 trillion for the first time, bringing attention to a long-standing worry that this debt burden may be hitting a tipping point for bond buyers. The third is a that the Federal Reserve has a new chair in Kevin Warsh, and for the many Fed Watchers, who are uncertain about where he plans to lead the Fed, the Federal Open Market Committee (FOMC) meeting coming up in mid-September looms larger than ever,” he said.

Can higher bond yields impact the stock market?

While investors worry about a possible sharp decline in stock prices due to rising bond yields, Damodaran said it can only happen if the yield increases by more than 3 basis points in one day. He noted that with the S&P 500 went down almost half a percent on days when the 10-year rate increased by more than 3 basis points and up about half a percent on days when the rate decreased by more than 3 basis points.

“The secret to equity resilience in the face of higher oil prices, interest rates and political turmoil has been in equity earnings, which have surged over the course of 2026,” he wrote, adding that history has shown that businesses find ways to deliver higher earnings in the face of higher rates, and markets price in these earnings to deliver solid returns, thus adapting quickly.

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Bond yields surge

Damodaran's analysis comes as the 10-year US Treasury yield surged to 4.97%, the highest level since late 2023. Investors now worry if the bond yield crosses the key 5% mark, a level briefly breached three years ago. The yields on 30-year US Treasury notes also hit their highest levels since 2007 at 5.38%, with the selloff in bonds spreading across the globe.

Analysts have pointed out that if the yield on 10-year notes crosses the key 5% mark, it can trigger a sharper selloff across global markets. “A correction in global equity market is likely, but the timing is hard to predict,” said V K Vijayakumar, Chief Investment Strategist, Geojit Investments Limited.

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Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.