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2016 when they started hiking rates in 2015, paused for nearly a year, but continued hiking the next December this pause fell short of a full year by a few days. Once they started a rate cycle, and then stood pat for a year, they always reversed direction. In no case, did the Fed stand pat for a full year and then return to their prior up or down direction as before.
To identify periods of Fed inaction, either after a period of rising rates or one of lowering them, I examined the history of Fed actions over the last 25 years. Examining Previous Extended Fed "Standing Pat" Periods To see what has happened in the past, I examined how stocks, as measured by the S&P 500, performed when the Fed either kept rates steady for at least a year after raising them or after similarly lowering them. On the other hand, if Fed fund rates start to fall without a pause, investors may sense the Fed has been "forced" into such an action by highly deteriorating economic conditions. For example, if rates continue to rise without a pause, investors may fear further drops in the stock market. Of course, in the current situation of rising rates, such a stable period might not happen at all or until beyond 2023.
Investors may feel if the Fed isn't doing anything, it perceives the economy must be more under control. On the other hand, when the Fed enters a recognizable, stable period, investors may feel most confident in further investing in the stock market.
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When investors expect the Fed to be moving rates either up or down in a close series of steps, it may create added uncertainty, which is something that investors tend to abhor. Perhaps it will be useful to once again evaluate how stocks have done during such "on hold" Fed periods, as in the above-mentioned article.
Several Fed officials have indicated they prefer, when inflation starts to seem more likely to return to their 2% goal, not to drop rates immediately, but to enter a period of holding rates steady for a while to see the effect of their prior rate rising actions. Surprisingly, my research implies that if one waits until such rates are actually falling, they may have already missed the best stock advances. This applies for steady rates over periods of at least a year. In a previous article on Seeking Alpha, I presented my own research showing that the overall stock market tends to do best of all during periods of steady (neither falling nor rising) Fed fund rates. Lately, whenever the stock market has hoped for either a slowing down of the size of Fed rate increases or a ceasing of these increases altogether, stocks have tended to rally. Fed officials suggest that it takes up to one year to assess the effect of prior rate increases, so in order not to overly increase rates, likely to increase the chance of a recession, such a pause seems prudent. Many hope that the Fed will stop raising rates some time in 2023. 19, 2022 8:14 AM ET VFFSX, VFIAX, VFINX, VOO, ACTV, AFMC, AFSM, ARKK, AVUV, BAPR, BAUG, BBMC, BBSC, BFOR, BFTR, BJUL, BJUN, BKMC, BKSE, BMAR, BMAY, BOCT, BOSS, BOUT, BUFF, BUL, CALF, CATH, CBSE, CSA, CSB, CSD, CSF, CSML, CSTNL, CWS, CZA, DDIV, DEEP, DES, DEUS, DFAS, DGRS, DIA, DIV, DJD, DON, DSPC, DVLU, DWAS, DWMC, EES, EFIV, EPS, EQAL, ESML, ETHO, EWMC, EWSC, EZM, FAB, FAD, FDM, FFTY, FLQM, FLQS, FNDA, FNK, FNX, FNY, FOVL, FRTY, FSMD, FTA, FTDS, FYC, FYT, FYX, GLRY, GSSC, HAIL, HIBL, HIBS, HLGE, HOMZ, HSMV, IJH, IJJ, IJK, IJR, IJS, IJT, IMCB, IMCG, IMCV, IPO, ISCB, ISCG, ISCV, ISMD, IUSS, IVDG, IVE, IVOG, IVOO, IVOV, IVV, IVW, IWC, IWM, IWN, IWO, IWP, IWR, IWS, IYY, JDIV, JHMM, JHSC, JPME, JPSE, JSMD, JSML, KAPR, KJAN, KJUL, KNG, KOMP, KSCD, LSAT, MDY, MDYG, MDYV, MGMT, MID, MIDE, NAPR, NJAN, NOBL, NUMG, NUMV, NUSC, NVQ, OMFS, ONEO, ONEQ, ONEV, ONEY, OSCV, OUSM, OVS, PAMC, PAPR, PAUG, PBP, PBSM, PEXL, PEY, PJAN, PJUN, PLTL, PRFZ, PSC, PTMC, PUTW, PWC, PY, QDIV, QMOM, QQC, QQD, QQEW, QQQ, QQQA, QQQE, QQQJ, QQQM, QQQN, QQXT, QTEC, QVAL, QVML, QVMM, QVMS, QYLD, QYLG, REGL, RFG, RFV, RNMC, RNSC, ROSC, RPG, RPV, RSP, YPS, RWJ, RWK, RWL, RYARX 3 Comments 7 Likes
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