by Chris Black
The Fed will probably pause its rate hiking cycle when the Real Fed Funds Rate/FFR (Fed’s interest rate minus inflation) turns positive.
This was mentioned in a recent BlackRock paper (www.blackrock.com/us/individual/insights/blackrock-investment-institute/weekly-commentary) which discussed terminal rate options, and JP Morgan acknowledges that this is most typical.
Every end to the hiking cycle and recession since 1970 (archive.ph/sLKPV) is preceded by a positive real rate.
With the March CPI at 5% and FFR from the last FOMC at 4.75-5% , the real fed funds rate is at about –0.25-0%.
It would take only one more 25bp hike, on May 3 (www.federalreserve.gov/monetarypolicy/fomccalendars.htm), for this to hit zero.
But since the Fed is on a mission to “restore credibility”, we expect the real FFR to reach at least 1% before a pause.
Which means, barring a sudden cascade of bank failures, a frozen Treasury market, or rebound inflation within two months, the Fed will probably pause at 5.5% on June 14.
During the low inflation period of the last 30 years, the final rate hike has led to a rally in stocks as traders price in a pivot .
We may see a brief rally in equities after the Fed signals in June it is done hiking, but don’t expect the same kind of follow-through in stocks this time: the last hike will be sold, and then begins the sell-off in stocks.
This is typical during an inflationary period , last seen in the 1980s.