Fed Chair Kevin Warsh Said the Central Bank Has "No Tolerance" for Inflation, and the Dow Dropped 840 Points. What It Means for Your Portfolio.

Federal Reserve Chairman Kevin Warsh just presided over his second meeting in his new job, and he's maintaining current interest rates, no hikes or cuts. The most recent inflation data show lower inflation, and some interest rates, like mortgage rates, have climbed on their own without help from the Fed. Warsh says that's the market doing its job.

However, he reiterated in a session with Congress that he and his committee "have no tolerance for persistently elevated inflation." He upheld his approach of not providing forward guidance, but the implication is that if necessary, the Fed will raise rates.

Federal Reserve Chairman Kevin Warsh. Image source: Federal Reserve.

That sent the Dow Jones Industrial Average (DJINDICES: ^DJI) down 840 points in one day. The DJIA is an index of 30 of the largest, most important stocks in the market, and its performance reflects broader market trends. A large drop like that indicates an overall market reaction.

The index has since recovered on the rate stability, for now at least. Here's what you can expect as the Fed continues its course to correct inflation.

Tightening policy could be harmful to your portfolio in the short run

Interest rate movements are intricately tied to stock market movements. The reason is simple: Interest rates determine how easy it is to borrow money. Lower interest rates mean easy money and more economic activity. Higher rates restrict money movement by making it harder to borrow, both from a commercial and personal standpoint.

From a business perspective, borrowing money can mean growth. Many companies, even very large ones, don't have enough money on hand to accomplish everything they want all the time. All upstarts, for example, live on borrowed money, from the bootstrapping, credit card-maxing ones to the venture capital-seeded unicorns. If the money supply is constrained, companies curtail operations, which constrains the economy; fewer products on the market lead to lower sales and potentially lower stock prices.

From a personal perspective, higher rates increase credit card interest and make it harder to buy a home or borrow for large projects or purchases, and there might be less money available to invest in the stock market.

The object is to lower inflation, which is ultimately good for the economy and your portfolio. The stock market always goes through cycles, like the economy and interest rates. Investors shouldn't expect any bull market to go on forever.

If rates do go up, expect market pressure, and make sure you have defensive stocks that can perform well in a high-interest rate environment, such as Costco Wholesale (NASDAQ: COST) and TJX Companies (NYSE: TJX). As long as you have a long time horizon, higher interest rates and some market correction shouldn't faze you.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and TJX Companies. The Motley Fool has a disclosure policy.