"History doesn't repeat… but it rhymes." — Mark Twain
◉ THE PRESENT
Kevin Warsh hiked rates yesterday. The Federal Reserve raised its target range 25 basis points to 3.75-4.00%, the first increase since July 2023, and then Warsh told reporters the funds rate isn't his primary weapon — he'd rather shrink the $6.7 trillion balance sheet. The S&P rose 0.3% because the waiting was finally over, but the bond market is already pricing three to five more hikes by next September. The last time the Fed reversed a cutting cycle to start hiking was March 16, 2022.
Brent $108/bbl | Fed funds 3.75–4.00% | S&P 500 7,610 | 10Y 5.00% | VIX 16.7
◉ THE ECHO — AUGUST 25, 1987
Seven Months Was Long Enough.
Alan Greenspan had been waiting since November 1998, when he'd cut rates for the third time in two months to keep the financial system from eating itself alive. A hedge fund called Long-Term Capital Management — two Nobel laureates on its board, $4.8 billion in capital backing $125 billion in assets and over a trillion in derivatives — had bet that the historical relationships between bond markets were as reliable as gravity. Then Russia defaulted on its sovereign debt in August, and the relationships broke all at once.
The New York Fed summoned fourteen banks to 33 Liberty Street on the evening of September 22nd. The pitch: put up $3.6 billion to unwind this thing in an orderly way, or watch the daisy chain of counterparty risk drag every trading desk on Wall Street into the wreckage. The banks paid. Greenspan cut rates three times — September 29th, October 15th, November 17th — taking the funds rate from 5.50% to 4.75% in seven weeks. By Christmas the crisis was a story people told over drinks.
By the spring of 1999, the economy wasn't just healthy — it was sprinting. GDP grew at 4.3% annualized. Unemployment sat at 4.3%. The Nasdaq was up 22.5% for the year and every venture capitalist between Sand Hill Road and Midtown was writing checks for startups whose business plans fit on a cocktail napkin. Pets.com hadn't gone public yet. That would come in February 2000, with a sock-puppet mascot and a market cap that made veteran analysts look at their shoes.
On June 30th, the FOMC voted 9-1 to raise the target rate 25 basis points to 5.00%. The one-paragraph statement acknowledged the LTCM-era cuts, framing this hike as a return to normal rather than the start of something new. Markets dipped on the afternoon and recovered within two weeks. By the Fourth of July nobody was talking about it.
Greenspan would hike five more times over the next eleven months — August, November, February, March, and May — carrying rates from 5.00% all the way to 6.50%. The Nasdaq nearly doubled. The S&P climbed another 11%. And somewhere around the third or fourth hike, the people who should have been worried stopped worrying entirely, because the market kept going up and the pain that everyone expected simply never arrived. Not yet.
◉ THE RHYME — WHAT'S IDENTICAL
Both times, the Fed reversed its cutting cycle. Both times, markets absorbed the first hike without real damage. Both times, the question was not the first hike — it was the five that came after.
◉ THE DIVERGENCE — WHAT'S DIFFERENT THIS TIME
The inflation source is different. Greenspan was hiking into potential inflation from an overheating economy — 4.3% GDP growth, 4.3% unemployment, wages ticking up. Actual CPI was barely 2%. He was playing offense. Warsh is hiking into actual inflation at 3.4%, driven by a supply shock from the Iran war that has pushed diesel to $6 a gallon. Rate hikes don't drill oil wells. Warsh is swinging at a pitch he can't hit.
The stock market is entering this differently. In June 1999, the S&P at 1,372 would rally another 11% to its March 2000 peak at 1,527. The Nasdaq nearly doubled. Markets ignored the hiking cycle for nine months. Today the S&P at 7,610 has already pulled back from its August high, consumer sentiment has dropped to 47.8, and small caps are sitting at three-month lows. This market is not sleepwalking into the hikes.
The political pressure has no precedent. Clinton left Greenspan alone. Trump has publicly pressured Warsh not to hike and warned of consequences. That variable didn't exist in 1999, and nobody can model what it means.
The toolbox has changed. In 1999, Greenspan had one instrument: the funds rate. Warsh told reporters he prefers shrinking the balance sheet — still over $6.7 trillion — and he has no interest in forward guidance. If Warsh accelerates the runoff while holding rates steady, the tightening could arrive faster and less visibly than any published rate path suggests. The market is pricing rate hikes. It may not be pricing the balance sheet.
◉ THE RECKONING — WHAT HAPPENS NEXT
Here's what followed Greenspan's first hike.
The market sold off on the afternoon of June 30, 1999, and recovered within two weeks. By August, Greenspan hiked again — 25 more basis points to 5.25% — and the Nasdaq barely flinched. It closed August at 2,739, September at 2,746, October at 2,966. The market had decided that rate hikes didn't matter.
Greenspan hiked a third time in November and a fourth in February 2000. The Nasdaq crossed 4,000 in December 1999, 4,500 in February, and peaked at 5,048 on March 10, 2000. Super Bowl ads that January cost $2.2 million for thirty seconds, and three of them were for dot-com companies that would be bankrupt within two years.
The S&P peaked two weeks later at 1,527 — up 11.3% from where it sat the day of the first hike. Then the floor gave way. The Nasdaq fell 78% over the next thirty months, from 5,048 to 1,114 by October 2002. The S&P lost 49%. Greenspan's final hike on May 16th — a 50-basis-point move to 6.50% — came two months after the peak. By January 3, 2001, he was making an emergency inter-meeting cut, the first of eleven that would take rates all the way back to 1.75%.
The early warnings were there. After the third hike in November 1999, the yield curve flattened hard — the two-year and ten-year Treasury spread compressed toward zero. Insiders at tech companies began selling shares at record pace in early 2000. The people who built the machine were stepping off while the people who believed the story stayed on.
The 1999 cycle says the first hike is not the cliff — it's the starting gun. Markets ran for nine months after Greenspan's first move. The real damage came later, signaled by the yield curve and by insider selling. In 2026, the equivalents are the 2s-10s spread and Warsh's balance sheet runoff pace. Yesterday's rate hike made the front page. The balance sheet will write the ending.
◉ TOMORROW’S WATCH
Tomorrow is quadruple witching — roughly $5 trillion in derivatives expiring the session after a rate hike, the same calendar collision that hit in June 2022 when the S&P lost nearly 6% in the week around Powell's first 75-basis-point move.
