Will Fed signal a slow down at the Nov meeting next week?

If you follow the mainstream media, you likely saw the headlines last week…

"Traders Raise Chances for a Lower Fed Rate Hike in December"

– CNBC

"The Federal Reserve Pivot Is Coming in December"

– Investor's Business Daily

"Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes"

– The Wall Street Journal

The WSJ piece made the biggest splash.

In the past few days, the market has been extremely bullish, a drastic change of mood as compared to just a week ago. Apparently there is a big hope that the Fed will slow down soon, or at least will signal that at the meeting next week. The million dollar question is how likely this will be true. I think there is a good chance. 

There are various reasons but one important factor for the Fed to consider is a special type of yield curve inversion. An inverted yield curve warns the Fed it's starting to enter the danger zone. And one curve in particular could stop the Fed in its tracks and turn the stock market around. In fact, it has preceded every recession in the last 60 years…

The mostly discussed yield curve inversion is about the 10 year vs 2 year Treasury yield. But actually the most important one is about the spread between the 3-month and 10-year Treasury yield. I believe Fed members closely follow this curve when making policy decisions. The central bank even wrote a paper about the predictive ability of this metric.

As Fed researchers stated, "it is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead."

And here's what it's signaling now…

On the chart below, you can see how this curve inverted below zero (black line) just last week for the first time since heading into the 2020 recession. The last recession periods are shaded in grey…

This is a clear signal rate increases are starting to have a major impact on the economic outlook.  By triggering this recession signal, the Fed may finally take a pause and assess their actions. As we have experienced so far, the rapid pace of increases has been a major catalyst for falling stock prices, so a temporary halt can act like a pressure relief valve for stock prices. The likely power redistribution in the DC post the midterm elections will likely further help the rally. 

Of course,  don't mistake a "pause" for an outright "pivot" to easier monetary policy. While I think there is a good chance we will see a good relief rally (with fluctuations) probably lasting toward the year end,  I still believe it will just be a bear market rally!