US Stock Rally Could Get Boost as Fed Could Soon Pivot Away From Monetary Tightening - Analyst

The US Federal Reserve may soon end the rate hike regime, according to analysts at Morgan Stanley. The inversion of the yield curve between 10-year and three-month Treasuries indicates that the Fed will soon pivot away from aggressive rate hike, said analyst Michael Wilson, according to Bloomberg News.

The observation comes days ahead of the meeting of the Federal rate setting committee. The expectations are that the Fed will raise interest rates by three quarters of a percentage points. this will be the fourth straight supersized rate hike aimed at taming inflation.

New York Stock Exchange
New York Stock Exchange Wikimedia Commons

The next meeting of the FOMC is in December. Analyst Wilson says that Fed comments this week will decide if the rally in stocks will continue. "Therefore, this week's Fed meeting is critical for the rally to continue, pause or even end completely," the analyst said.

'Economy Will be Resilient'

In late September, the Federal Reserve hiked interest rates by 75 basis points, signalling that it is willing to go the distance in the fight against inflation. However, the Fed, which acknowledged the dampening effect of rate hikes on growth, said it expects the US economy to be resilient. It says there will be "modest growth in spending and production" going forward.

The US stocks have been rallying in the last two weeks, spurred on by hopes that the Fed chief's comments in the November policy direction will offer hopes of the tapering of monetary tightening.

"This kind of price action isn't unusual toward the end of the cycle particularly as the Fed moves closer to the end of its tightening campaign, something we think is approaching," analyst Wilson said.

Looking for Downshift

Meanwhile, Goldman Sachs Group analyst David Kostin wrote in a note that stock markets will see hope if hopes of a federal rate down shift takes hold, along with strong fourth-quarter outlook. "In 17 bear-market rallies since 1970, the S&P 500 rose by an average of 15% over 44 days," analysts led by David Kostin wrote.

US stocks
People queue beside the bronze bull in the Financial district which has become a Wall Street icon in New York City, July 18, 2013. U.S. stocks continued to rise on Thursday, sending the Dow Jones Industrial Average and the S&P 500 to fresh all-time highs, boosted by upbeat economic data and corporate earnings. IANS

According to the Morgan Stanley strategists, S&P 500 could rally to 4,150 points, in the short term, marking a 6 percent gain. However, UBS Global Wealth Management says that there is no chance of the Fed pivoting away from high rates any time soon.