Don’t Wish for the Fed to Pause Rate Hikes in September

Last week’s rising stock prices suggested that many investors are still wishing the Federal Reserve will step in to counter downward pressures on the market. Hopes for this “Fed put,” however, may be confusing the Fed’s willingness to act with its ability to do so.

Markets breathed a noticeable sigh of relief last week when Rafael Bostic, the president of the Atlanta Fed, opened the door to the possibility that the Fed might pause its rate hikes in September. Such a hiatus would be warranted not by the Fed regaining control of inflation but rather by concerns about the effects of continued tightening on the equity markets.

It’s premature for investors to hope that such an early pause would boost stocks.

Given persistent high inflation, the Fed is theoretically barred from easing financial conditions in the short term just to support the stock market. This constraint could be relaxed, however, in two ways — one good and one bad.

First, an already late Fed could theoretically succeed quickly in fighting inflation. That would require improvements on the supply side of the economy, due to the resolution of supply-chain bottlenecks and to higher growth in productivity. Such a scenario would also need labor force participation to increase, and have a mix of accumulated personal savings and targeted government support enable most households to navigate the transition period.