We recently discussed whether the US Federal Reserve would pause on their interest rate hikes or continue, and also discussed the effect that a potential pause may have on the stock market. We are going into further detail on this now that the Fed has paused on the interest rate in the wake of the ongoing inflation deceleration.On June 14, the Fed opted to leave interest rates unchanged at 5.25% for the first time since February 2022 . The so-called pause comes after US inflation was down to 4.
The theme of inflation versus interest rates in the US has dominated the macroeconomic agenda since the Fed began its rate hike in February 2022, the fastest rate hike in recent US history as shown by the chart below. Whether that announcement was to allow it more time to make a decision rather than seeing the economy begin to speed up again just as it has begun to tame inflation is another debate.The question we’re interested in is: What happens to equities if the Fed is indeed done raising interest rates?
However, markets are forward-looking. Once investors are comfortable that interest rates have peaked, and that there are higher potential future earnings as a result, their sentiment shifts leading to higher consumer confidence and increased spending.