Pivot or Not: Wall Street Can’t Agree Over Impact of Fed’s Future Rate Hikes

Federal Reserve, Washington, United States - 04 May 2022
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While an additional 75 basis point rate increase is widely anticipated at the close of the Federal Open Market Committee (FOMC) meeting on July 27, Wall Street strategists have divergent views about what the future holds for inflation and the markets — and in turn, what the Federal Reserve’s actions might be for the remainder of the year.

Bloomberg reports that Morgan Stanley strategists believe it’s too early to expect the Fed to stop tightening its policy despite increasing fears of a recession, which, in turn, would mean “that stocks have more room to fall before finding a bottom.”

“High inflation provides a real constraint for the Fed to pause or pivot, even if they decided a risk of recession was imminent. That’s the main difference versus more recent cycles and why we think it remains a good idea to stay defensively oriented in one’s equity positioning until further earnings disappointments are factored into consensus estimates or equity prices,” Mike Wilson, chief investment officer and chief U.S. equity strategist for Morgan Stanley, said in a July 25 Morgan Stanley podcast.

Goldman Sachs strategists echoed this sentiment, saying in a July 25 note that “at this stage, we would be wary in calling for a sustained pro-cyclical shift across assets as we think markets might be underestimating the risks of continued inflationary pressures, which might keep the central bank put far out of the money for longer.”

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“Our economists expect a continuation of the hiking cycle in both Europe and the U.S. with a 75bp hike at this week’s Fed meeting,” Cecilia Mariotti wrote in the note sent to GOBankingRates.

JPMorgan Chase Strategists Disagree, Believe Fed Will Pivot

On the other hand, JPMorgan Chase strategists believe that bets that inflation has peaked “will lead to a Fed pivot and improve the picture for equities in the second half,” according to Bloomberg.

JPMorgan’s Mislav Matejka said that challenging activity momentum and softer labor markets could open doors to “a more balanced Fed policy, leading to a peak in the U.S. dollar and inflation,” according to Bloomberg.

Meanwhile, Edward Moya — senior market analyst for the Americas, OANDA — wrote in a note sent to GOBankingRates that the Fed “is still in a very good position to deliver another 75 basis-point hike as inflation stays around a four-decade high and as the economy is still adding jobs at a healthy clip.”

“The Fed’s Bostic, Waller, Daly, Mester, and Bullard all have voiced support for a 75bp rate increase this week. Since the Fed was late to fight inflation, it should not come as a surprise that they will try to remain aggressive with tightening as the outlook dims,” Moya wrote. “An economic downturn is coming as the debate on how soon remains intense. Many parts of the economy are weakening and that is why many are expecting the full impact of inflation to trigger a recession by the middle of next year. The risks are there for a recession later this year, but that should not be the base case. Too much of the economy is still in decent shape and some inflation has been easing over the past several weeks.”

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In June — and as expected — the Federal Reserve raised interest rates by 75 basis points, the first time it has done so since 1994. The move was widely anticipated and comes amid a market that has entered bear territory and exhibits a rate of inflation pegged at a 41-year high, as GOBankingRates previously reported.

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