almost 2 years ago • 1 min
Back in 1994, an Alan Greenspan-run Federal Reserve launched a notably aggressive interest rate-hike cycle, raising the federal funds rate by 3 whole percentage points in just one year (dark blue line above). Today, investors are expecting the current rate-hike cycle under Jerome Powell to be just as steep (red line). So should that worry you? Not necessarily.
In 1994, like today, the Fed was trying to cool an overheating economy. And, impressively, it worked: inflation slowed, but the economy stayed strong. It was the first and only time that the Fed managed to raise rates without pushing the economy into a recession, engineering a “soft landing” that even comparably conservative cycles couldn’t manage. And while it had tough consequences for bond markets and emerging economies, the cycle didn’t dent the bull market in stocks, which remained robust until the dotcom bust five years later.
Sure, the environment is different today: inflation is double what it was then, the economy has become used to extremely accommodative monetary policy, and stock valuations are at record highs. But the ’94-’95 rate cycle gives investors – and Powell, who has praised Greenspan as a model – some hope that the current cycle won’t push the economy into a recession.
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