After the Fed stopped raising interest rates, did they lower them? Anyway, the US stock market believes it.

On Wednesday, as expected, the Federal Reserve raised interest rates for the 10th consecutive time, raising the federal funds rate to a range of 5% to 5.25%, the highest level since 2007, and opening the door to a pause in rate hikes.

Powell emphasized that the decision to raise rates in June will depend on the upcoming data and that this week's meeting did not make a decision on whether to pause rate hikes. However, Fed observers say that the dynamics surrounding Fed decisions have already changed.

What does stopping rate hikes mean?

Senior Fed observers say that the Fed and Powell are unwilling to be more explicit about the end of the rate hike cycle, which is expected.

After last year's crash, the stock market rebounded in 2023. Last year's crash was due to the Fed's active rate hikes to curb inflation, which has since declined but remains well above the Fed's 2% target.

So what happens once it is very clear that the pause is effective?

Gargi Chaudhuri, head of investment strategy for BlackRock Americas iShares, said it is important to remember that the Fed's pause in rate hikes does not equate to a "turnaround" by the Fed.

During the pause, the Fed maintains high rates and monitors economic performance and inflation. She noted that since 1990, the Fed has averaged a 10-month pause between its last rate hike and its first rate cut.

The market has already digested rate cuts

As for the market, Chaudhuri wrote that the Fed's pause initially led to rebounds in both the stock and bond markets, which often experience volatility before the first rate cut after a pause.

At the same time, investors have already digested the fact that the Fed will begin cutting rates before the end of the year.

Since the Fed began aggressively raising rates in March 2022, market participants have repeatedly digested pauses and inflection points, proving that this is immature.

Chaudhuri said that stock investors need to prepare for potential volatility by turning to high-quality stocks and strategies with minimal volatility.

Limited attractiveness of stocks

Meanwhile, UBS said that a pause in rate hikes cannot change what has already happened - economic slowdown and a tendency for risk to decline.

"At the same time, investors hope that the Fed will turn to rate cuts as soon as possible, which will provide resistance to a stock market decline of more than 10%, unless economic growth and earnings declines are far greater than expected," he wrote.

He said that this could cause the S&P 500 index to be slightly below UBS's year-end target of 3,800 points.

He said: "The ultimate result is that stocks still look unattractive compared to high-quality bonds at current levels." "To change this situation, the Fed needs more than just a pause in rate hikes."