For clues on when Fed may pivot from rate hikes, look to impact on US domestic economy

FOLLOWING the Bank of England’s intervention to arrest instability in the UK pension system, combined with growing concern over the risk of a meaningful bank failure in Europe, the narrative of a coming Fed pivot has returned to markets. Similar speculation had spurred the summer rally, but now the prospect of international instability may serve as a driver.

Fortunately, investors can draw upon nearly four decades of examples of Fed action in dealing with instability outside US borders for an understanding of how the Fed reacts in such matters.

Investors will recall that since 1980, persistent Fed rate-hiking cycles have often been followed by domestic as well as international instability – in the form of bank failures, such as Continental Illinois in 1984; a bursting of asset bubbles such as the “junk” bond collapse in 1989 or the bursting of the dotcom bubble in 2001; or global credit crises.