We know that interest rates hikes work with a lag, so it takes 6-12 months for the effects to ripple through the economy. We know that we’ve had 16 straight rate hikes that has taken the Fed Funds rate from 1% to 5%. Shouldn’t Chairman Bernanke and the FOMC take a break, and see how the two-year long rate-raising campaign affects everything?
That’s the case for the Fed to quit. I’m in that camp, personally. It’s not like the Fed can’t raise rates whenever they want to anyway. If they pause for a month or two and regret it, you can always go back and raise some more. Would such a plan have any drastic repercussions? I doubt it. And let’s not forget, even though the market gets on a regular timeline with the FOMC meetings, Bernanke and Co. can move between meetings if they need to.
The way I see it, the stock market has stabilized after getting down to S&P 1,225, 8% below the highs. It has a little room to rebound, given the chance. If we get more of the same later this week from the Fed, and by that I mean a 25 bp hike and a similar statement to recent ones, equities will have a tough time to hold current levels. Uncertainty is always bad for stocks. If we get a signal that this hike is the last one for a while, I think can get a brief rally that might get us to back close to 1,300 on the S&P 500. At that point, I’d probably do some selling.
Another less likely option, but a good one nonetheless, would be to move 50 bp this week and signal a pause. This would satisfy both those looking for a hawkish stance on inflation, as well as a pause to observe the ultimate effects of all of these hikes. I think the market would rise in this scenario as well. I hope Bernanke decides to take a wait and see approach, but we’ll just have to, well, wait and see.