Authored by Simon White, Bloomberg macro strategist,
It’s unusual for the Federal Reserve to hike again after a pause as long as the current one. Nonetheless it does happen, favoring the risk-reward for the next move to be for higher rates.
The Fed has been on hold since its meeting in July.
The market is now gunning for greater interest-rate cuts, with 90 bps priced by the end of next year.
This hiatus of about 18 weeks would be historically the most likely outcome for the length of the current pause in rates.
I looked at all the times from 1971 when the fed funds effective rate had been held steady for at least 18 weeks, the last move was a hike, and then the Fed hiked rates again.
(Easier said than done to calculate given how erratic the rate was in the 1970s and 80s compared to the steady, smooth, generally well-telegraphed approach established by Alan Greenspan.)
There have been only five occasions when this has previously happened, shown in the chart below:
As shown in the table, some pauses have been much longer than the current one.
The longest was a year that ended in 2016 during the rate-hiking cycle began by the current Fed Chair’s predecessor, Janet Yellen.
So based on the past, the central bank could be on hold for much longer and yet its next move is another hike rather than a cut.
That’s not to say the market will not try to price more cuts in the interim, although as I noted earlier, we’d likely need to see clear signs of an impending recession to really push short-term rate curves flatter.
Either way, for trades betting on cuts to be profitable likely require a potentially deep recession.
However, trades that go the other way, especially if they have limited negative carry (e.g. December 2024 SOFR out-of-the-money put spreads) have the risk-reward skewed in their favor.