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The last time the Fed raised rates by such a magnitude was November 1994.
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Alan Greenspan raised rates 7 times over the course of 13 months
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The stock market fell slightly that year but recovered 34% in 1995
The United States Federal Reserve (Fed, the central bank) announced this Wednesday a rise in the official interest rate of 0.75 pointsthe largest increase in 28 years, to fight runaway inflation.
With this increase -which is the third since the Fed began to raise rates in March-, the official interest rate of the world’s largest economy falls to a range between 1.5% and 1.75%. .
In an official statement at the end of their two-day meetingthe Board of Governors of the Federal Reserve system also announced that it expects to carry out more rate hikes in the future.
A historic move by the Fed
The last time the Fed raised rates by 75 basis points was in November 1994., when the central bank was able to orchestrate a soft landing by tightening monetary policy ahead of rising inflation. Then-Fed Chairman Alan Greenspan raised rates seven times over the course of 13 months, from 3% to 6%, between early 1994 and early 1995.
In 1994, stocks were slightly negative for the year (falling only 1.2%), and the Fed was able to avoid a recession and stocks rallied 34% in 1995. Also, after the November rate hike In 1994, stocks fell only slightly, according to data from CFRA Research.
Can the Fed achieve the same kind of soft landing in 2022?
Stocks are already down 22% this year, And while the Fed was tightening ahead of inflation in 1994, today it is “struggling to catch up,” says James Stack, president of InvesTech Research and Stack Financial Management.
“The biggest current difference from the successful ‘soft landing’ of 1994-95 is how extraordinarily behind the Fed is,” and has essentially “fallen asleep in the swing,” Stack argues. “Where the Fed should have started gradually raising interest rates early last year with emerging signs of inflation, they instead continued to stimulate the economy, both with 0% interest rates and continued monthly bond purchases.” , he adds.
In 1994, the Federal Reserve was raising interest rates to levels much higher than the annual change in consumer prices, says Sam Stovall, chief investment strategist at CFRA Research. “This time, inflation is [aumentando a un ritmo] significantly faster than interest ratesso it’s a totally different situation where the Fed has to act much more aggressively.”
Despite a host of negatives weighing on the markets today, one of the positives is that the economy remains fairly strong, says Charles Lemonides, founder and chief investment officer of ValueWorks. “The biggest drawback is that conditions are so good that the Fed has to make them worse by cooling the economy, so it may be a position of strength similar to 1994.”
Note prepared with information from EFE and Forbes Argentina