Pivot means different things to different people. The word is poorly defined.
The Fed does not have to lower the rates. They might even hike 25bp (misguidedly, imo) and then wait.
But the Fed should not keep hiking. That "variable lag" effect of interest rates is the key. The lag is catching up and even more importantly, banks are now going to tighten their lending standards. So the Fed does not have to keep hiking. They can pause and see how much impact this fiasco is going to have on the credit markets and then hike if they must.
Here's an excerpt from a research paper I was reading last night:
This study investigates the long-term and dynamic relationship between US sector stock returns and risk factors, focusing on uncertainty. Uncertainty risk factors include volatility indices associated with the equity (VIX), fixed-income (TYVIX), oil (OVX), and foreign exchange (EUVIX) markets. The cointegration analysis shows that VIX, TYVIX, OVX, and EUVIX are collectively driving forces of US sector indices in the long run. The causality testing results reveal that uncertainty about long-term interest rates, as proxied by TYVIX, exerts a significant effect on US stock market performance across sectors. Interestingly, in determining the variability of sector stock returns, we find that shocks to the uncertainty of crude oil prices and the exchange rate play a more important role than shocks to their levels.
In other words, the uncertainty is a lot worse for the markets than actual interest rates or oil prices or exchange rates or anything else. Or as a portfolio manager put it the other day, "You can't price assets if you can't price the risk free rate." This is why posted that MOVE chart.
The idea that the Fed should be focused on the past and ignore the present and the future is ludicrous. Anyone who thinks we should drive forward by looking through the rearview mirror has no place in policy making bodies. Furthermore, the risk/rewards favor a pause or at most one last 25bp hike and then a pause. What is the worse that could happen? They pause for a month and hike 50bp in the next meeting instead of this one. |
