A Fed pause in sight?
On Wednesday night, the FOMC rate decision will grip markets with consensus looking for no rate hike, and then 60% probability for a rate hike at the July meeting according to Fed Funds futures. The Fed economic projections are likely to show higher expected growth in 2023 and lower unemployment rate compared to the previous projections. In addition, the median dot plot will likely highlight one more rate hike before the peak is reached with the target range set to 5.25-5.50%. The key question for the market will then be whether the economy can absorb the new policy rate and even grow at a healthy pace without slipping into a recession. The Fed maintained roughly this currently policy rate for around four years during the period 1995-1999 in which the US economy was able to grow and corporate earnings did well, and at least not stopping a bubble in technology to form. Another scenario is the 2006-2007 period in which the Fed paused around mid-2006 with equities and the economy continuing higher all the way through to the end of 2007.
For equities the lessons over the years have been that there are moments when policy decisions mean a lot to equities, but the vast majority of the time it means little. This time is not the big pivot point for equities as they relate to the policy decision. What matters the most for equities are whether we get a recession or not, and right now equities are pricing in that a recession is not very likely, or if we get one it will be a mild one in relative terms with nominal GDP growth still around 6%.