- The Federal Reserve raised interest rates by 75 basis points on Wednesday, its biggest hike since 1994.
- Jerome Powell looks increasingly likely to copy Alan Greenspan’s 1990s playbook, analysts say.
- Greenspan’s Fed raised interest rates seven times in 13 months, leading to a massive bond sell-off.
implemented its largest interest rate hike in 28 years on Wednesday.
Bill Clinton was president, Boyz II Men topped the charts, and Pulp Fiction was still playing in theaters the last time the Fed raised interest rates 75 basis points.
But with inflation at its highest level in four decades, Chairman Jerome Powell borrowed from Alan Greenspan’s playbook of the 1990s, announcing a new target rate range of between 1.50% and 1.75% and declining to rule out a similarly sized hike next month.
“Fed actions in recent days bring back memories of 1994,” said Emmanuel Cau, equity strategist at Barclays.
The Fed’s latest decision has instilled considerable uncertainty in stock and bond markets.
The S&P 500, Nasdaq 100 and Dow Jones Industrial Average all rebounded from Wednesday’s rise, before giving up most of those gains Thursday. Bond yields also fell on Thursday, with 2-year US Treasuries down 3.9 basis points to 3.24% and 10-year US Treasuries down 1.8 basis points to 3 .38%.
“Inflation could be more persistent and deeply entrenched than expected,” Itay Goldstein, a finance professor at Wharton, told Insider. “The market expects the Fed to take increasingly tough action, and that’s why we’re seeing price declines.”
The 1994 Playbook
Greenspan’s Fed raised rates seven times in 13 months in 1994 and early 1995 in an effort to prevent an overheated economy from driving up inflation.
Between 1994 and April 1995, the federal funds rate nearly doubled, from 3.05% to 6.05%.
Stocks rallied on the back of the Fed’s aggressive rate hikes. The S&P 500 and the Dow Jones Industrial Average climbed 36.6% and 42.0% respectively between the start of 1994 and the end of 1995.
That doesn’t mean investors should automatically expect a soft landing from this cycle, analysts said. Annual inflation in the United States was only 2.7% in 1994, according to Worldwide Inflation Data, while it reached 8.6% last month.
“After the last rally in early 1995, stocks have rallied,” Barclays’ Cau said. “[But] With much higher inflation this time and potentially more tightening to come, fears of a hard landing are unlikely to dissipate soon.”
And the return to the 1994 playbook could be far more traumatic for bondholders – as Greenspan’s seven rate hikes led to what has been called the “bond market massacre”.
Rising rates tend to make bonds less attractive because they offer less interest compared to savings accounts and they only provide a fixed return. As rates rose sharply, bond prices fell, with over $1 trillion wiped out in the fixed income market in November 1994.
“The Fed’s rate hike in 1994 was aggressive and dramatic,” Michael Wang, managing director of investment platform Prometheus, told Insider. “Bond markets suffered the most from rapidly rising bulls as investors were caught off guard by hawkish decisions.”
Bonds today are already heading into a bear market, with 2-year Treasury yields moving inversely to prices, up 2.417 percentage points to 3.151% in 2022. Treasury yields 10-year are up 1.710 percentage points to 3.222% year-on-year. Date.
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