Tom Lee said he expects the Federal Reserve to pause and recalibrate interest rate hikes in 2023, helped by softer economic data. “It’s been tough to fight the Fed, and, you know, we’ve had a real tough time with our calls this year,” the FundStrat head of research said on “Closing Bell.” “As we get into October, I don’t think investors are fighting the Fed if they think stocks have upside from here. I think that’s one of the big changes.” Lee pointed to the fact that tail risks are coming off, specifically pointing to the UK prime minister stepping down Thursday after markets reacted to the government’s tax-cutting plan. Meanwhile in the US, he said earnings have been “quite good” despite expectations that the bear market would leave company bottom lines “crushed.” Lee added that earnings should broadly deliver upside “surprises,” though some companies, specifically those with prior pricing power, may be slowing coming off pandemic-induced booms. Lee said the Fed has not reported seeing impacts yet on inflation from rate hikes already enacted, but he does sense the central bank’s message is changing. The issue is that the consumer price index is no more than a “lagging” indicator. Supply chain changes could help cool inflation and labor isn’t playing as much a role as previously expected. Lee also pointed to “soft data” around used cars and housing that could signal to the central bank that inflation is at least easing somewhat. At a certain point, that soft data will “synch up” with more widely quoted gauges of inflation, he said. “Even though CPI still looks pretty strong, I think the Fed would be happy to see any weakening of inflation,” he said. “And I think that’s coming.” Even against that background, Lee isn’t expecting the Fed to stop in its tracks or reverse course, predicting a “pause” rather than a “pivot.” He sees the Fed continuing to raise rates through 2022 before stopping to “look around.” But Lee warned about a potential “off sides” if the Fed pauses just when investors are increasingly getting into shorter-term strategies. “It’s like a chicken little question, he said, “but I think that this past week has actually really been in the bull’s favor.” Watch Lee’s full interview here:
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