October FOMC: Why the Fed Will Pause

October FOMC: Why the Fed Will Pause

Last month, Fed Chair Kevin Warsh and the Federal Reserve hiked interest rates by 0.25% to a target range of 3/75% to 4.00%. Although President Trump has been an outspoken proponent of lower interest rates, the Fed’s decision was unanimous as it tried to quell sticky inflation and higher energy prices spurred by the ongoing Iran War. The decision marked the first rate hike in three years, reversing prior cuts.

“Earnings don’t move the overall market; it’s the Federal Reserve Board…focus on the Central banks and focus on the movement of liquidity.” ~Stanley Druckenmiller

Monitoring the Fed’s next monetary policy is absolutely critical for investors as Fed liquidity (or lack thereof) is the biggest driver of equity prices. Despite the Fed’s “hawkish” rate hike last month, mounting evidence suggests Warsh and the Fed will NOT hike rates again at the October 27-28 meeting. Below are 5 reasons why:

1.      Jobs Market Weakens: Friday, the Bureau of Labor Statistics (BLS) unveiled lackluster jobs numbers. July and August hiring numbers were revised downward by a combined 60,000 jobs, erasing earlier perceived strength.

2.      Hawkish Fed Speak: Two top Fed officials, Fed Vice Chair Philip Jefferson and Federal Reserve Bank of New York CEO John C. Williams, recently hinted that there is no currently urgency for the Fed to deliver another rate hike.

3.      Betting Markets: Rate-hike odds plunged recently on popular betting markets. For instance, on Polymarket, the odds of an October rate hike plunged from 69% to just 17%.

4.      October Rate Hike Pre-Midterm is Unprecedented: Recent history favors the Doves. Since 1990, the Fed has never hiked interest rates when it met in October ahead of a midterm election in November.

5.      Government Inflation #s Lag: Government inflation numbers are notoriously stale. Truflation offers a more up-to-date inflation number. According to Truflation, CPI is at 2.77%, much lower than the government’s reported 3.4% and closer to the Fed’s target.

What Does this Mean for Investors?

Rate hike cycles are not necessarily blanketly bearish. The difference between a bullish and bearish rate-hike cyckle is the pace of hikes. In other words, if the slower the rate of hikes, the more bullish it is for equities. Today, stocks are reflecting this notion as AI leaders such as Arm Holdings (ARM), Advanced Micro Devices (AMD), Marvell Technologies (MRVL), Applied Optoelectronics (AAOI), and Nebius Group (NBIS) jump.

Bottom Line

Monitoring the Fed’s next policy shift remains crucial as market liquidity dictates equity momentum. The overwhelming evidence suggests an October pause is in order.

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This article originally published on Zacks Investment Research (zacks.com).

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