The US Federal Reserve raised interest rates for the past 28 years on Wednesday. Bill Clinton was president, Boyz II Men topped the charts, and Pulp Fiction continued to hit theaters last time the Fed raised interest rates by 75 basis points. But with inflation at a four-decade high, President Jerome Powell borrowed from Alan Greenspan’s playbook of the 1990s, announcing a new interest rate range between 1.50% and 1.75% and refusing to rule out a similar increase next year. month. “The Fed’s recent actions bring back memories of 1994,” said Emmanuel Cau, a strategic stock analyst at Barclays. The Fed’s latest move has caused significant uncertainty in both stock and bond markets. The S&P 500, Nasdaq 100 and Dow Jones Industrial Average rose after the announcement of the increase on Wednesday, before giving up most of these gains on Thursday. Yields on bonds also fell on Thursday, with US two-year bonds down 3.9 basis points at 3.24% and 10-year US bonds down 1.8 basis points at 3.38%. “Inflation may be more persistent and deep-rooted than previously thought,” Itay Goldstein, a professor of economics at Wharton, told Insider. “The market expects the Fed to take tougher and tougher measures, and that is why we are seeing prices fall.”
The book of 1994
The Greenspan Fed raised interest rates sevenfold to 13 months in 1994 and early 1995 in a bid to prevent an overheating of the economy from boosting inflation. Between 1994 and April 1995, the interest rate on federal funds almost doubled, rising from 3.05% to 6.05%. The shares rallied after the aggressive increases of the Fed interest rates. The S&P 500 and the Dow Jones Industrial Average rose 36.6% and 42.0%, respectively, between the beginning of 1994 and the end of 1995. This does not mean that investors should automatically expect a gentle landing this cycle, according to analysts. Annual US inflation was only 2.7% in 1994, according to global inflation data, up from 8.6% last month. “After the final rise in early 1995, stocks rose,” said Barclays’ Cau. “[But] “With inflation soaring this time around and possibly more tightening in the future, worries about a hard landing are unlikely to go away any time soon.” And a return to the 1994 playbook could be much more traumatic for bondholders – because Greenspan’s seven interest rate hikes have led to what is being called a “bond market massacre.” Interest rate hikes tend to make bonds less attractive because they offer a lower interest rate than savings accounts and only provide a stable return. As interest rates rose sharply, bond prices plummeted, with more than $ 1 trillion disappearing from the fixed income market by November 1994. “The Fed’s rate hike in 1994 was aggressive and dramatic,” Michael Wang, chief executive of investment platform Prometheus, told Insider. “Bond markets have suffered the worst from the rapid rise in growth, with investors being wary of hawkish decisions.” Today’s bonds are already moving towards a bear market, with 2-year bond yields moving in the opposite direction, rising by 2,417 percentage points to 3,151% in 2022. 10-year bond yields rising by 1,710 percentage points to 3.222% on the date. Read more: Wells Fargo Investment Advisory arm says a recession will hit soon and stocks will not return to their previous highs until 2024. See how it says investors need to prepare.
