The Fed won’t pivot away from its interest rate hikes until one of these 3 things happen

  • Investors should be holding their breath for a policy pivot by the Federal Reserve. 
  • That’s because one of three things happening before it can pivot away from interest rate hikes, Ned Davis Research said.
  • “One of the main tenents of the NDR philosophy is ‘Don’t Fight the Fed,” NDR said on Tuesday.

As the stock market moves lower and lower, more and more investors are calling for the Federal Reserve to pivot away from its path of interest rate hikes.

But investors shouldn’t hold their breath because the Fed needs more than a plunging market to end their current rate hike policy, Ned Davis Research said in a note on Tuesday. 

Instead, the Fed likely needs one of three things to happen that would jolt them away from the current monetary tightening policy, which is something no investor should fight.

“One of the main tenets of the NDR philosophy and our Ten Rules of Research is ‘Don’t Fight the Fed,’ or more generally don’t fight the trends in monetary policy,” NDR said.

The Fed is expected to hike interest rates another 75 basis points at its November 2 FOMC meeting as it continues to struggle with elevated inflation readings. The Fed has already hiked interest rates by 75 basis points three times so far this year, along with a 50 basis point and a 25 basis point rate hike. 

These are the three off-ramps the Fed has to pivot away from their current interest rate hike path and either pause or end them as they assess the economic damage that is poised to take place over the coming months, according to NDR.

1. Evidence that inflation is headed lower

“We used to think that meant core PCE inflation falling below 4.0%, but making monthly progress toward that level may be sufficient,” NDR said.

2. Softness in the labor market.

“An unemployment rate of 4.0% or more with fewer job opening and rising unemployment claims could indicate the economy is starting to feel the pain the Fed has been inflicting,” NDR said.

3. Companies can’t get funding.

“The liquidity and functioning of the markets deteriorate to the point that companies can’t get funding, or something breaks in the financial system,” NDR said. 

But without any of the above conditions, the Fed will likely feel compelled to hike interest rates until one of them materializes.

“That’s important because yields tend to peak at or before the end of the tightening cycle,” NDR said.

Until then, it’s premature for investors to call a peak in bond yields. And it’s difficult for the stock market to halt its descent and move higher until bond yields peak and begin to move lower.

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