Fundstrat's Tom Lee says the Fed could pause its rate hikes next year - and suggests stocks may rebound in the months ahead

• The Fed is gearing up to pause interest rate hikes by next year, Fundstrat's Tom Lee said Thursday.
• There's a possibility the Fed will "take a look around" after two big rate hikes by year-end.

The Federal Reserve is making preparations for a potential pause in interest rate hikes next year after months of aggressive monetary policy, while stocks may rebound in the months ahead, according to Fundstrat's Tom Lee.

Speaking in a CNBC interview Thursday, Lee said he doesn't expect the Fed to immediately reverse its monetary policy the minute inflation drops, but he said a pause rather than a pivot next year is a much higher possibility.

"I don't think the Fed is saying, 'We're going to get a great number, we're going to pause'. But I think the Fed is now laying groundwork for two pretty big hikes into year-end, and then the possibility of taking a look around," he said.

"And that's a huge change. Because if the Fed is potentially going to pause, it's not a pivot. It really changes how risk is positioned."

The market is expecting the US central bank to increase interest rates by another 75 basis points at its November and December meetings, as it tries to cool inflation running at 40-year highs.

The Fed's series of outsized rate hikes this year have led to a surging dollar and ignited worries the US will go into recession, spurring calls for the central bank to pivot by stopping or reducing its rate increases.

According to Lee, signs that inflation are weaking are coming, and that should give the Fed more reason to pause in its rate hikes. His predictions feed off earlier comments he made in a note, where Lee said "soft" data shows inflation is easing, while "hard" data continues to lag.

On stocks, Lee offered an upbeat tone. He suggested US stocks will have upside from here and implied that investors who are bullish on stocks are not wrong. "I just think the odds are very good for investors," he said.

"It's been tough to fight the Fed — and, you know, we've had a real tough time with our calls this year," Lee said. "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," he added.

Lee said in September that the S&P 500 could rise to meet Fundstrat's year-end target of 5,100, a gain of over 35% from current levels.