Image source: Pixabay

(I have broken Betteridge’s law of headlines — the answer to the question in the headline is “yes.”)

I would guess that this week’s Fed hike will be followed by a “pause,” but that pause may be just for one meeting. Although my bias is to assume that the weakness is partly equity market shenanigans, the banking system is having trouble digesting rate hikes. The Fed can afford to wait a meeting to see what happens.

The latest U.S. labor market release was strong, but an economy bear can point to negative revisions. Blowout inflation data could trigger a hike at the next meeting, but waiting still seems like the path of least resistance.

In any event, I see no reason to have strong convictions as to what happens in the next couple of meetings. The Fed has to be hoping that they can go on hold with the policy rate within 50 basis points of the current level while economic data continues to chop. The labor market remains strong, yet there are pockets of weakness showing up. The rather boring outcome of the policy rate going mainly sideways for a year or two is a scenario that cannot be discounted. It is easy to see stories for rates moving either up or down, but we have finally reached the level where sideways is plausible as well.

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