“Life after rate hikes isn’t always what it’s cracked up to be,” the head of macro strategy wrote in a recent note.
After rates peaked in the last three cycles, stock markets plummeted, the economy staggered and within nine months the Fed had to cut rates, he said.The reason for this is that central bankers use, and they only stop when they think the economy has taken enough punishment. In fact, they are more likely to err on the side of too much, rather than too little, and that seems to be the case this time around, he said.
Take for example the year 2000 when the Fed hiked rates to 6.5 per cent. Forecasts at the time called for the U.S. economy to continue to grow in the following year, but almost immediately after the last hike, the S&P 500 reversed course, said Mendes. Over the next few years, the market tanked by almost 50 per cent and the jobless rate went up 2.5 percentage points.
“The end of this rate hiking cycle will imply that central bankers deem the outlook sufficiently gloomy,” said Mendes. “So whenever the Fed signals the end of this latest tightening campaign, traders might want to keep the champagne on ice because it might just be the beginning of a much more challenging environment.”Article content