Mark Lister: Fed hike cycle begins

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Last month, the US Federal Reserve, the world’s most influential central bank, began its “hiking cycle” by raising interest rates.

It’s a big event, and certainly not one that happens every day. In
In fact, it’s only the fourth in 30 years.

The others started in 1994, 1999, 2004 and 2015. Although each of them took place in different contexts for the global economy and financial markets, there is always information to be learned from the past.

The good news is that the start of a Fed hike cycle is not necessarily catastrophic for the US economy or the stock market.

On each of these occasions we saw a bit of turbulence to begin with, but 12 months after the first rate hike, the S&P 500 was higher on all four occasions.

An economy can almost always withstand rising interest rates at first, and the stock market usually continues to perform strongly too.

It’s not a big surprise. When central banks decide that interest rates should rise, it is usually in response to a solid backdrop, with low unemployment and high economic activity.

Monetary policy also operates with a lag, which means it takes time for changes in interest rates to trickle down to the economy.

Beyond those first 12 months, things get a little murkier and it’s much harder to predict what might happen.

It all depends on whether interest rates continue to rise, how the economy holds up in response, and what else emerges along the way.

Recessions, slumps, and major stock market crashes can sometimes follow, although they are not necessarily caused by hiking cycles.

After embarking on a bullish cycle in 1994, the Fed had doubled its policy rate by mid-1995. No recession or bear market ensued, although rising U.S. interest rates likely helped to the Mexican peso crisis and the Asian financial crisis in the middle of the year. 1990s.

The next Fed hike cycle began in 1999, and it didn’t end well for the US economy or its stock market. The S&P 500 peaked nine months later before falling nearly 50%, and the U.S. economy was in recession by early 2001.

It was the infamous burst of the dot-com bubble, which followed a period of massive over-exuberance in previous years.

In 2004, the Fed resumed raising its key rate, which was at a record high of 1%. The American economy was very strong at the time, and it remained so for another three and a half years.

The S&P 500 peaked in October 2007 and the US economy entered a recession two months later. It was the GFC, which most of us remember all too well.

The last hike cycle began in late 2015. This saw the Fed hike interest rates nine times over the next three years, as well as reversing its QE program in 2018.

No recession ensued, although the S&P 500 fell nearly 20% at the end of 2018. The Fed then found itself cutting interest rates in 2019 as the economy began to stumble, and then the pandemic hit.

This time around, it’s hard to say how things will pan out. With the “takeoff” behind us, the Fed is expected to continue raising interest rates at every meeting through the end of 2022.

If inflationary pressures ease, the Fed may back off. This would likely see the current expansion continue for some time, taking corporate earnings and stock prices with it.

If it fails to get inflation under control, the Fed could find itself in the uncomfortable position of having to keep raising interest rates, despite an economic slowdown and rising unemployment.

It is in this second scenario that the risks of recession really come into play.

Mark Lister is head of private wealth research at Craigs Investment Partners. The information in this article is provided for informational purposes only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making an investment decision, Craigs Investment Partners recommends that you contact an investment advisor.