Equity Bulls Don't Have Much To Celebrate In A US Fed Pause

Forget past patterns as today’s economic circumstances are unique

- Jonathan Levin

Investors have long made a lot of money buying stocks when the US Federal Reserve delivers the last increase of an interest rate-hiking campaign. But not every rate apex is the same, and this week’s ‘hawkish pause’ looks particularly precarious for equities. First, consider the wording used by the Fed on its change in posture. In announcing its 25-basis-point increase in the fed funds rates to a range of 5% to 5.25%, the US central bank also removed this key wording from its post-meeting statement (in the third paragraph):

“The [rate setting] Committee anticipates that some additional policy firming may be appropriate..."

But it retained a version of this word-soup formulation:

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

In the strange world of Fedspeak, that amounted to a half-hearted admission that the elusive ‘pause’ has finally (probably) arrived. But the Fed retained its hawkish bias, which should disappoint market doves who think it should already be weighing rate cuts in the second half of the year.