History can help equity investors maintain perspective as monetary policy tightens, says Raymond James Chief Portfolio Strategist Nicholas Lacy.
With the US Federal Reserve (Fed) and other central banks going down the path of increasing policy rates, it seemed a good time to look at market impacts over the last 40 years or so. Since 1984, there have been six cycles where the Fed raised the fed funds rate multiple times. Each time the Fed raised rates, it was based on a different set of circumstances; however, there were usually some similarities in each cycle. Bear in mind, it takes time for rate hikes to work through the economy, yet the markets are attempting to forecast the impact one year out.
Historically, the Fed has raised interest rates as a way to cut pricing pressures that could lead to higher inflation. In each instance in which the Fed raised rates in the last 40 years, inflation was moving to a higher point and unemployment was at, or below, the natural level of unemployment. On average, the unemployment rate has been 5.5% when the Fed started the rate hike cycle, with the 4.2% unemployment rate in 1999 being the lowest rate. When the Fed started raising rates in March of 2022, the unemployment rate was approximately 3.8% and below the 4.0% target the Fed set. The big difference in 2022 is the level of inflation which is the highest since 1982. How this impacts sector performance going forward compared to the past remains to be seen.