How a hawkish Fed could kill a baby bull-market rally in U.S. stocks

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Wall Street is calling it a "hawkish pause" or a "hawkish skip."

It’s the notion, which has grown popular that the Federal Reserve could suggest it may need to raise interest rates further in coming months, even if it refrains from raising rates again when its two-day policy meeting ends on Wednesday.

The May consumer price index is forecast to rise 4.0% for the year, down from a rise of 4.9%, while the core index, excluding food and energy prices, is seen easing to a rise of 5.3% from 5.5%. The so-called “Mega-cap eight” stocks — a group that includes both classes of Alphabet Inc. stock GOOG GOOGL , Microsoft Corp. MSFT , Tesla Inc. TSLA , Microsoft Corp. MSFT , Netflix Inc. NFLX , Nvidia Corp. NVDA , Meta Platforms Inc. META — have driven nearly all of the S&P 500’s gains this year, according to Ed Yardeni, president of Yardeni Research, who included his anlaysis in a note to clients.

Consequences of a ‘hawkish pause’ However, if the Fed delivers delivers a hawkish surprise of its own, perhaps even going so far as to hike rates despite its usual protocol of signaling its moves clearly in advance, stocks could be vulnerable to a sharp pullback. While the Fed has a history of closely telegraphing its moves to the markets in advance, Tuesday’s last-minute inflation report could complicate things.

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