Don’t be too optimistic that the Fed’s going to quickly move between a pause and a pivot, Charles Schwab chief strategist says

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It’s overly optimistic to believe that the Federal Reserve will move quickly between pausing its monetary tightening campaign and potentially slashing interest rates next year, according to Charles Schwab’s chief strategist.

Liz Ann Sonders said Monday that investors have overestimated the time it will take for the central bank to pivot to easing monetary policy in 2023.

“There’s a bit too much optimism around the timespan between pause, whenever that is, and pivot,” she told CNBC’s ‘Closing Bell: Overtime’.

Some economists expect the Fed to start slashing interest rates towards the end of 2023 to support economic growth as inflation starts falling back towards its 2% target.

The majority of traders expect the central bank to cut rates at its November and December meetings next year, according to the CME Group’s FedWatch Tool.

But it’s unlikely the Fed will pivot that quickly unless a wave of weaker economic data suggests it’s steering the US into a recession, according to Sonders.

“The market has an expectation of two rate cuts by the end of 2023, and it’s our view that the conditions would have to get a bit more dire than they are now for the Fed to get the green light to start cutting rates,” she said.

“It wouldn’t just be inflation continuing to come down, it would have to be a more significant weakness either in the broad economy or more specifically in the labor market,” Sonders added.

Positive economic data has weighed on stocks in recent days by signaling that the Fed has more scope to tighten without plunging the economy into a recession.

November’s non-farm payrolls report showed that the economy added a stronger-than-expected 263,000 jobs last month, while the ISM Services Index’s 56.5 reading Monday showed that the services sector is still expanding despite the Fed’s rate-hiking campaign.

Recent positive economic data suggest that the Fed will have to contend with recessionary fears for a while rather than negotiating a sudden “hard” or “soft” landing scenario, according to Sonders.

“The best case scenario is not so much a traditional soft landing, but maybe just a continuation of the rolling nature of this,” she said.

“This is not a typical cycle,” Sonders added.  “Recessions tend to be everything falls at once or lands softly all at once. This is happening over an extended period of time, with a rolling nature to it.”

Read more: The Fed cutting rates by 200 basis points and oil falling to $40 a barrel are among Standard Chartered’s list of potential surprises for 2023