Here’s how markets responded the last time the Fed raised rates by 75 basis points

This year’s stock market carnage continues to fester, with the S&P 500 recently plunging into a bear market amid growing fears of a looming recession. Investors are increasingly concerned about the Federal Reserve’s ability to make a “soft landing” – lowering inflation without pushing the economy into recession – as it tightens monetary policy aggressively.

Most Wall Street experts expect the Federal Reserve to raise interest rates by 50 basis points, which will raise the Fed funds rate to 1.25%, at its policy meeting on Wednesday.

After a higher-than-expected inflation reading (consumer prices hit a 41-year high) last week that fueled recession fears, however, some experts are now calling for a 75 basis point rate hike. In recent days, several major companies including Goldman Sachs, Barclays and Jefferies have changed their forecasts with a 50 basis point increase to 75 basis point.

The last time the Federal Reserve raised interest rates by 75 basis points was in November 1994 when the central bank was able to orchestrate a smooth landing by tightening monetary policy before inflation spiked. The increase was part of a series of rate hikes by then-Fed Chairman Alan Greenspan, who raised interest rates seven times over 13 months, from 3% to 6%, between early 1994 and early 1995 in an effort to maintain Economy. from high temperature.

In 1994, stocks were only slightly negative during the year (down only 1.2%), the Fed managed to avoid a recession and stocks returned 34% in 1995. What’s more, after a rate hike in November 1994, stocks fell Only slightly before rebounding before another rate increase in February 1995, according to data from CFRA Research.

Can the Fed achieve the same kind of easy landing in 2022? Stocks are already down 22% this yearAnd the While the Fed was tightening before inflation in 1994, today it is “catch up fast,” says James Stack, president of InvestTech Research and Stack Financial Management.

“The biggest difference today with the successful ‘soft landing’ of 1994-95 is the unusual extent to which the Fed is behind the curve,” Stack argues, which is essentially “asleep at the switch.” “When the Federal Reserve should have started to raise rates gradually early last year with signs of inflation, it has instead continued to stimulate the economy – with 0% interest rates and ongoing monthly bond buying,” he adds.

In 1994, the Federal Reserve was raising interest rates to levels well above the annual change in consumer prices, notes Sam Stovall, senior investment analyst at CFRA Research. This time, inflation [rising at a pace] Much faster than interest rates – so it’s a completely different situation where the Fed has to act more aggressively.”

Despite the myriad of negative factors weighing on markets today, one positive factor is that the economy remains fairly robust, says Charles Lemonides, founder and chief investment officer at ValueWorks. “The biggest negative is that conditions are so good that the Fed has to make them worse by calming the economy – so this could be a strength position similar to what it was in 1994.”

If the Fed is forced to raise interest rates more than expected on Wednesday, how will the stock market react? Best case scenario: Stocks trade sideways and then rise slightly after the Fed’s announcement, according to Lemonades. “However, setting the odds is next to impossible — one could make an argument for stocks to rise or sell regardless of whether the Fed increased 50 basis points or 75.”

Stovall believes markets will be “disappointed” if the Fed does not raise interest rates by 75 basis points, however, as it “would not be enough to reassure investors” in the face of inflation continuing to rise to new highs. If the central bank sticks to its earlier story and raises interest rates by only half a percentage point, it will appear to be “related to action rather than response to data.”

“The economy still appears to be on a stable footing, but the problem is that the confidence behind that foundation is collapsing,” Stack says. He points to several worrying signs, including waning CEO confidence, small business expectations and consumer confidence. “In short, the Fed has screwed it up completely” and there is “little doubt that we are heading into a potentially hard landing for the economy,” he adds.

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