Hopes of a Fed pivot are rising. Here's why the RBA's lower-than-expected rate hike has buoyed investors.

Australia's central bank raised interest rates less aggressively than expected, and that's lifting hopes that the Federal Reserve won't hike interest rates too much.

The Reserve Bank of Australia hiked rates Tuesday. Before the bank's October meeting, seven of the 28 economists projected that the level would go down.

It was the first central bank to abandon large rate hikes. In order to prevent high inflation from becoming embedded in their economies and to prop up their currency, over 80 central banks are raising rates.

The Fed's dovish decision is likely to give investors confidence in the Fed's ability to slow the pace of rate hikes.

ING strategists said that recent hopes of a pivot have been disappointing. It's not clear if economic circumstances have changed enough to prompt a policy change despite signs of a housing downturn.

"Investors may be hoping for a slower pace of hikes, or for quantitative tightening to be reconsidered."

The hopes may have been reinforced by the 25 basis point hike by theRBA.

Markets have been rattled by the Fed's rate hikes. Despite fears of a possible US recession, investors are expecting another 50 basis point hike in November.

The central bank is embarking on a program of quantitative tightening in order to cut the money supply.

A Fed pivot to a smaller rate hike could lead to a short-term rally in the stock market.

The Australian dollar fell as much as 1% against the US dollar after the Reserve Bank of Australia's decision.

In the US, stock futures gained ground in premarket trading Tuesday, with the S&P 500 futures up over 2%. The S&P 500 futures increased 1.6%.

There were multiple factors driving the rally, but the main one was growing speculation that central banks could soon pivot towards a more dovish stance.

More of that thought will be encouraged by the overnight move of theRBA.

The Australian central bank is in the same boat as the Fed in trying to avoid a sudden economic downturn. Philip Lowe, the governor of the Reserve Bank of Australia, said that policymakers were looking to cool inflation but keep the economy stable.

Lowe said in a statement that the path to achieving this balance is a narrow one.

The Fed will likely need to see more evidence that its rate hikes are driving an economic downturn before it commits to a pivot.

The Fed has the world in its hands, and it's making global economic chaos that could hurt the US.