The Federal Reserve has never skipped a rate hike and then restarted it. From an economic perspective, this does not make sense and may even bring new risks.
If the Fed skips a rate hike next week but tightens monetary policy again a month later, it would be the briefest pause in its modern history. Some Fed officials are signaling that this is the case and markets are pricing in that expectation.
The last time the Fed paused rate hikes was between 2017 and 2018, when it kept rates unchanged for six months in 2017 before restarting them. But a pause of one or two rate hikes at the end of this cycle would be the first time ever.
Macro strategist Simon White wrote in his latest article that after the Federal Reserve's expected pause in rate hikes next week, the next move is more likely to be a rate cut rather than a rate hike, because interest rates have reached restrictive levels, inflation is falling, and the economy is in recession. Here are White's views:
Before further rate hikes, markets are pricing in just a 30% chance of a rate hike at next week’s Fed meeting. Even by late summer, the world and the Fed may face a very different environment, with the risk calculations starting to tilt in favor of easy monetary policy.
There are three main factors that could change the Fed’s decision-making framework and prompt it to exit the rate hike cycle after pausing:
The Fed rarely pauses and then restarts rate hikes when policy is already tight;
Inflation will continue to decline in the coming months, while labor cost pressures will be revised down significantly;
The job market is weakening rapidly.
It may come as a surprise, but it is rare for the Fed to tighten policy again after pausing. It is even rarer to do so when interest rates are already at restrictive levels.
The Fed will have more and more evidence that allows it to avoid further rate hikes. As time goes by, the environment becomes more favorable for policy easing. Therefore, the refreshing pause may eventually become a prelude to rate cuts.
