Will the Fed pause become a Fed pivot?

The US Federal Reserve is done hiking rates. That’s the consensus in financial markets right now, following last week’s quarter-point hike.

Fed chief Jerome Powell has hiked rates by over five percentage points since March 2022, bringing them to levels unseen since before the global financial crisis in 2007. Then, the Fed kept rates at that level for 15 months, but no one is expecting a repeat performance. Markets expect the Fed pause to become a Fed pivot, and have priced in three rate cuts before the end of 2023.

Now, markets have been too early on this front multiple times over the last year, repeatedly and prematurely pricing in pauses and pivots. Powell last week repeated that it looks too soon to cut rates, reiterating his usual wait-and-see approach.

Either way, history suggests better times are ahead, says Ryan Detrick of the Carson Group. He looked at the past 10 times where the Fed stopped hiking rates. A year later, the S&P 500 was up on eight occasions, enjoying average and median gains of 14 and 16 per cent, respectively. Of course, the worry is that this time may well be different, as it was in mid-2000, when a Fed pause was followed by substantial losses.

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In any event, the short-term outlook remains uncertain. Detrick’s data shows that six months after the last Fed hike, stocks were lower on four out of 10 occasions. Instead of taking a firm position, investors might do well to keep an open mind and heed Powell’s wait-and-see message.