Markets have been cheering the recent dovish tones by the Federal Reserve, but according to some strategists, investors shouldn’t get too high on the central bank’s recent pivot.
Albert Edwards, a market strategist at Societe Generale, warns that history shows a recession follows after the central bank decides to back off on more rate hikes in 2019. Following the fourth rate hike in December, Fed Chairman Jerome Powell forecasted two rate hikes in 2019 as opposed to its initial projection of three.
“If we are indeed nearing the point where the Fed stops tightening … should this offer investors confidence that an equity bear market can be avoided? No! Traditionally the yield curve steepens as the Fed eases immediately prior to a recession,” said Edwards.
Policy Time Lag
The Fed is aware that global growth concerns remain one of the crosscurrents affecting the markets, but a decision to pause its rate hiking policy doesn’t necessarily mean the economy will feel its affects instantaneously, David Rosenberg, chief economist and strategist at Gluskin Sheff, warns.
“What people don’t seem to get is that monetary policy hits the economy with a time lag,” said Rosenberg. “But the Fed actually does realize this and is becoming more vocal about the prospect that it has already overtightened.”