What does a turnaround in monetary policy mean for the stock market?

The pain is probably still deep-seated for many stock investors: In the wake of high inflation rates worldwide and the subsequent cycle of interest rate hikes by many central banks, stocks recorded significant price losses last year, with few exceptions. In retrospect, it is not surprising that the markets saw price corrections of over thirty percent in some cases, as the current cycle of interest rate rises is almost unique in terms of the extent and speed of the increases.

But how far has the current cycle progressed? Has the Fed already reached the peak of key interest rates barely a year after the first rate hike? Even though the inflation rate in the US in January, at 6.4 percent, was still far above the target inflation rate of two percent, the hope of monetary policy easing has led to price rallies on the US stock markets in recent weeks. While Jerome Powell and other US central bankers are ruling out an interest rate cut in 2023, the market is already pricing in an interest rate cut in the fourth quarter of 2023.

To find out how likely we think such a monetary policy turnaround is, how the Fed has handled interest rate cut cycles in the past and how the stock markets have reacted, read our latest Economic and Strategy Report: