Maybe there’s nothing in past Fed rate raising actions that’s strictly comparable to the situation today. However, the period that’s most often cited as a possible model is the one from May 1994 through February 1995. During that time the Fed raised rates by a total of +2.25% in four moves–May, August and November 1994 and February 1995.
the Fed in 1994-95
The Fed moves themselves, and the stock market responses, played out as follows:
–the Fed Funds rate remains constant at 3.75% throughout 1993, a period when the S&P 500 rises by 9%
——–from the market high on January 28, 1994 through May 13th S&P falls by -10%
—May 17, 1994, Fed raises the Fed Funds rate by 0.50% to 4.25%
——–S&P 500 rises by 4% from May 17 through August 16
—August 16, 1994, Fed raises the Fed Funds rate, again by 0.50%, to 4.75%
——–S&P 500 is flat from August 16 through November 15
—November 15, 1994, Fed raises Fed Funds rate by 0.75% to 5.50%
——–S&P 500 rises by 4% from November 15 through February 1, 1995
–February 1, 1995, Fed raises the Fed Funds rate by 0.50% to 6.0%–and stops
——–S&P 500 rises by 29% through yearend 1995.
aggressive rate increases every three months, totaling 225 basis points
the S&P 500 falls in ahead of the onset of rate moves, wobbles briefly as rates are raised, goes sideways/up until the next rate increase–and advances strongly once the Fed stops
relevance for today?
Entering 1994, real GDP in the US was growing at about a 5% annual rate (or about two percentage points above the maximum sustainable growth rate)–and accelerating. So the Fed acted very quickly to slow the economy down.
We’ve got a very different problem today. Growth is barely at trend. Expansionary monetary policy has been exhausted, and has overstayed its welcome simply getting us to this point. Washington has consistently failed to use fiscal policy to support GDP growth, and shows no signs of wanting to live up to its responsibilities.
The purpose of Fed Funds rate increases this time is to minimize economic distortions that happen when too much money is sloshing around in the system (think: oil and gas junk bonds with no restrictive covenants), rather than to slow down runaway growth.
In 1994, the S&P sagged significantly in advance of the Fed’s initial move. The index also stumbled slightly around the time of later rate increases. But, apart from day-to-day wiggles, the index went sideways to up during the rate rising period.
Did the Fed design its rate behavior with an eye to keeping the stock market stable back then? That’s not clear. However, that certainly was what resulted from Fed action. And avoiding stock market declines was clearly Allen Greenspan’s modus operandi in the Fed’s subsequent rate policy.
Today’s Fed has been quite explicit in its intention to avoid market turbulence that might occur were rates to rise too fast. 1994 shows us, I think, that it can accomplish that objective. The Fed already seems to be signalling that its original plan to raise rates by 100 basis points this year is being revised downward.
That period also suggests that the major stock market adjustment comes very early in the process. Arguably, that’s what the declines of August-September and November-January are all about.
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