What kind of scenario will the Fed raise interest rates by 50bp in March? Are U.S. stocks and bonds cleared or held and prayed? Although the market expected that the probability of raising interest rates by 50bp in March had risen to nearly 80% after the release of inflation data in January, after all, the Fed's last interest rate increase by 50bp was far away in 2000. Therefore, if the Fed really raised interest rates by 50bp in March, it is not that the market expected too much, but that the Fed finally realized that what it had given was not enough.
Therefore, from now until the silence period of the interest rate meeting in March, if more and more federal reserve changes to support the 50bp interest rate hike in March, this scenario will no longer be a tail risk. At present (as of February 10, 2022), only hawk Brad is the Fed official who supports the 50bp interest rate hike in March. Other officials either oppose or think the time is not ripe and need to be verified by economic data. We think we should pay close attention to the statements of Fed officials next, especially the testimony of Powell when he submitted the semi annual monetary policy report to congress at the end of February, and the February inflation data to be released one week before the interest rate meeting in March. If we find that the tone of Fed officials turns unanimously, we are likely to see the rare fed interest rate increase in recent 30 years.
Taking history as a mirror, in the history of the Fed raising interest rates by 50bp, how did the economy and assets perform?
In the four interest rate increase cycles since 1990, there have been five interest rate increases of more than 50bp, focusing on the two interest rate increase cycles from February 1994 to February 1995 and from June 1999 to May 2000. But these five operations are not the first in the interest rate hike cycle. The emergency interest rate hike and the operation of raising interest rates by more than 50bp since 1990 are due to the increasing employment demand and increasing inflationary pressure under strong economic activities.
After the emergency interest rate increase of 25bp in April 1994, the interest rate increase was accelerated by 50bp in May:
In terms of economic fundamentals, after the recession in the early 1990s, the momentum of economic recovery increased significantly in 1994. Although the severe cold has restrained some consumption and investment demand, the capacity utilization rate has further increased. After the bad weather, the number of new non-agricultural employment increased sharply in March and April 1994, and the average weekly working hours increased to an all-time high. Meanwhile, energy prices soared during the year, and inflation expectations rose further to 3% in April. On the other hand, after the previous two interest rate hikes, bond and stock prices fell sharply. The Federal Reserve believes that speculative sentiment has decreased and the financial market is unlikely to overreact to the interest rate hike; Even if interest rates continue to rise, the US economy can maintain a high growth momentum during the year. Therefore, the Federal Reserve urgently raised interest rates by 25bp in April 1994 and raised interest rates by 50bp at the subsequent interest rate meeting.
In terms of asset performance, the accelerated interest rate hike by the Federal Reserve in 1994 led to a sharp rise in US bond yields, but did not lead to a sharp decline in US stocks. In the stock market, after the first two interest rate hikes, the S & P 500 has fallen by 9% by the beginning of April 1994. Although the Federal Reserve raised interest rates by 50bp in May, August and November respectively, the US stock market made periodic adjustments after the interest rate hike, but it was in shock as a whole. In the same period, the yield of 10-year US bonds rose sharply, with the largest increase of 80bp in the year.
In May 2000, the Federal Reserve raised interest rates by 50bp, which was also the last interest rate increase in this round of tightening cycle:
In terms of economic fundamentals, at that time, the rapid development of information technology promoted the economic prosperity of the United States, the unemployment rate fell to a low point, and the rise in the prices of crude oil and other commodities prompted the inflation risk to surface again. In March 2000, the CPI has risen to 3.8%, but the rising labor cost from March to may indicates that the inflationary pressure may further increase, and the inflation expectation will further rise to more than 3.0%. In addition, the rapid expansion of total demand has exceeded the potential supply level, and there are signs of further tightening of labor and other resources. In view of these circumstances, the Federal Reserve decided to raise interest rates by 50bp to 6.5% in May after raising interest rates by 25bp five times from June 1999 to March 2000, thus ending the current interest rate increase cycle.
The US Federal Reserve raised interest rate 50bps not only ended the cycle of raising interest rates, but also ended the "bubble of science and technology network". Nearly half a month after the 50bp interest rate increase, US stocks fell by 5%. After the rebound, they fluctuated sideways in nearly four months. Finally, due to the weakening of the US economy and the significant decline in the profitability of listed companies, US stocks entered a bear market. The US bond interest rate only rebounded slightly within a few days after the announcement of interest rate hike. Under the background of downward economic fundamentals and weakening stock market, it fell by nearly 130bp in six months. In March 2001, the US economy entered recession.
Taking history as a mirror, if the Fed raises interest rates by 50bp, we think 2022 is more like 1994, but the high valuation of the stock market is a hidden danger. The acceleration of the Fed's interest rate hike in 1994 and 2000 led to very different performance of stocks and bonds. An important reason is that 1994 was in the early stage of the economic rise cycle, while 2000 was in the late stage of the cycle. The US Federal Reserve's interest rate hike in October 1994 and the US stock market's valuation rate hike in 2023 are more important. However, from the perspective of the US Federal Reserve's interest rate hike in October, it may lead to the stagnation of the US stock market's valuation rate in 2023.
Risk tip: the spread of the epidemic exceeded expectations, and the effect of policy hedging against the economic downturn was less than expected
