Hurdle rates after a Warsh hike: what CFOs reprice

September 14, 2026 · 5 min · Free, with full transcript

Kevin Warsh refused to rule out a rate increase with inflation above the 2% target and oil above $100, and the two-year Treasury yield moved about 20 basis points in a session. The position here is blunt: CFOs who built 2026 rate cuts into a single base case treated a forecast as a fact, and the arithmetic of refinancing at 7% instead of 5% costs a billion dollar balance sheet roughly $20 million a year. You walk away able to rerun your capital budget at a higher discount rate, pressure test acquisitions and capex that depend on financing, check interest coverage covenants for a breach caused by rates alone, and price tariff uncertainty into your risk premium.

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4 min

Chapters

Key takeaways

  • Rerun your capital budget at the higher discount rate now, not after the next Fed meeting.
  • Keep a rates up 100 basis points version of your plan ready instead of modeling one number.
  • Test any deal with rate contingent financing at 7% rather than the 5% you budgeted.
  • Check interest coverage covenants, since a rate jump can trigger a breach with no change in the business.
  • Take your biggest pending capital decision and rerun it 150 basis points above base case before approving it.
Read the full transcript

Host:Welcome to the Leaders Insights Podcast. Today's episode, Warsh's credibility test and what it means for every capital decision you're making now. Kevin Warsh spent this week signaling the Fed might hike again. And every CFO who penciled in rate cuts for 2026 just had their spreadsheet blow up. Walk me through it.

Expert:Here's what happened. Warsh, now running the Fed, and a genuine inflation hawk, gave a speech Tuesday where he refused to rule out a rate increase with inflation still running above the 2% target and oil sitting above $100 a barrel. Markets heard that and immediately reprised. The two-year Treasury yield jumped roughly 20 basis points in a single session.

Host:Twenty basis points. Sounds like a rounding error to anyone outside a trading desk.

Expert:It's not a rounding error when it moves your hurdle rate. The minimum return a project has to clear before you'll fund it. If your cost of capital creeps up even half a point, a chunk of your pipeline that looked like a yes last month is suddenly a maybe or a flat no.

Host:Be concrete. Whose numbers actually break here?

Expert:Anyone with floating rate debt or a refinancing wall in the next 18 months. Think about a company that borrowed cheap in 2021 and has term loans maturing in 2027. They budgeted to refinance, at say, 5%. If Warsh follows through, they're staring at seven. On a billion dollar balance sheet that's $20 million a year of extra interest. Real money that comes straight out of earnings.

Host:So the CFOs who assumed that tightening cycle was over were just wrong?

Expert:They were lazy, not wrong. They treated a forecast as a fact. The mistake wasn't believing in cuts. It was building one number into every model and never stress testing the other direction. You should always have the rates go up 100 basis points version of your plan sitting in a drawer.

Host:Fine, but forecasting the Fed is a mugs game. What do you actually do differently on Monday?

Expert:Three things and I'll be specific. First, you rerun your capital budget with the higher discount rate today, not after the next Fed meeting. Second, you look hard at any deal with financing contingent on rates. An acquisition, a big capex build, and you ask whether it survives at 7%, not 5. Third, you check your covenants.

Host:Covenants, the promises in your loan agreement.

Expert:Right, the tripwires your lenders put in. An interest coverage covenant says your operating profit has to be some multiple of your interest bill. When interest jumps, that ratio compresses fast, and you can breach a covenant without your business getting $1 worse. That's the thing that surprises people.

Host:Give me a name. Who's exposed right now?

Expert:Look at the private equity-owned world, highly leveraged companies loaded with floating rate debt, firms that did leveraged buyouts in 2021 at rock bottom rates. Their sponsors modeled an exit in 2026 or 2027, assuming cheap money. If Warsh keeps rates high, those exits get pushed out, and the returns get ugly. That's not a forecast. That's arithmetic.

Host:You keep saying arithmetic, but there's a credibility angle in this article's headline. What's Warsh actually testing?

Expert:His own credibility. He's new. He's hawkish. And if he blinks the moment oil spikes and tariffs get messy, the market stops believing him, and inflation expectations drift. So he almost has to sound tough. Which means for planning purposes, assume he means it. Don't bet your capital structure on the Fed being your friend.

Host:And tariffs sit on top of all this. How does that change the math?

Expert:Tariffs are a cost shock and an inflation input at the same time. Unpredictable tariff policy means your input costs have a wider range of outcomes, which raises your risk premium, the extra return investors demand for uncertainty. That pushes your cost of capital up independently of whatever Warsh does. You're getting squeezed from two directions.

Host:So leave me with the one thing to do this week.

Expert:Take your single biggest pending capital decision, the one you were about to greenlight, and rerun it at a discount rate 150 basis points higher than your current base case. If it still clears, approve it. If it doesn't, you just found out before your lenders did. Consider to break your own spreadsheet and let Warsh do it for you.

Host:Thanks. Sources for today's episode. CNBC Finance Financial Times. CFO Dive, accounting today. Done. Want to know where you actually stand? Take the CFO self-assessment at MBA-training.com.

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