A faltering economy – not peaking inflation – will give the Fed a green light to stop raising rates, Charles Schwab's top stock picker says
- Federal Reserve will only cut rates when it's worried about a recession, Charles Schwab's CIO said.
- Friday's jobs report will help markets to gauge the health of the US economy.
The Federal Reserve will only start cutting interest rates when it's worried about US economic weaknesses, with a natural fall in inflation unlikely to be enough to make it pivot, according to one of Charles Schwab's top strategists.
The brokerage's chief investment officer, Liz Ann Sonders, said markets need to start focusing on economic data other than monthly Consumer Price Index reports.
"The only reason the Fed would have a green light to pause or lessen the aggressive pace of rate hikes would be a more significant weakness in the economy, not just a peak in inflation," she told CNBC on Tuesday.
The Fed has raised interest rates this year as it tries to tame soaring prices, with inflation running close to four-decade highs.
However, the central bank has signaled that it could soften its approach if there's evidence that the US economy is weakening. Rising rates have hit consumer demand and housing activity levels, making economic contraction more likely.
Markets' next opportunity to gauge the economy comes on Friday with August jobs numbers. Sonders said that a positive report would reflect economic strength and is likely to encourage the Fed to continue raising rates.
"If you continue to see strong labor market data, that in turn gives a green light to the Fed to continue on their aggressive path," she said.
Rising interest rates rocketed back up investors' list of concerns last Friday when Fed chair Jerome Powell spoke in Jackson Hole, Wyoming.
He signaled that the Fed planned to keep interest rates at higher levels until inflation was fully tamed. That rattled stock markets, with the S&P 500 tumbling 5.1% since Powell's speech.
Sonders said Powell's comments show that the Fed's rate-hiking campaign won't be deterred by any natural cooldowns in inflation - and that markets shouldn't have been surprised by its hawkish stance.
"The macro narrative and Fed-related narrative that had developed around the time the market bottomed was a pivot to rate cuts," she said. "I don't think that narrative made a lot of sense."
"I'm not surprised to see some of this digestion now – I think it could have happened before Jackson Hole if people were paying attention," Sonders added.