The past week news from Fed on pausing rate hike, with this it is safe to say, investors think the Fed is done with rate hikes, and they are taking that as a big positive for equity markets.
The Fed kept interest rates steady at 5.25-5.5% at their November meeting, pausing for the second meeting in a row.
Powell went on to say that risks are more balanced now, unlike last year. Last year the risk was that they would not do enough to curb inflation, and so they moved aggressively. However, right now, there is also a risk of doing too much, and unnecessarily sending the economy into a recession. Moreover, if inflation continues to head lower, which is likely with wage growth cooling, we could see the Fed pivot to rate cuts by the middle of next year, probably.
If inflation looks to be on a sustainable path to their target of 2%, we could see them pivot sooner rather than later. By itself, keeping rates where they are when inflation is falling means policy is implicitly getting tighter. Powell does not sound like someone who wants that. And if economic growth is at risk, they could act even more aggressively. One thing we have seen with the Fed is that they have been quick to pivot and act aggressively when they realize they are behind the curve.
Enjoy the moment, it feels nice to have your stocks going up… just don’t get too used to it, we have had a whipsaw of sentiment over the past two months and there is a good chance that there will be further “shocks” in the near future. Caution is still recommended…
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