The five interest rate hike cycles in history tell you what will happen if the Fed ends raising interest rates.
In the second quarter of last year, the US economy achieved a growth rate of 4.1%, which is the fourth time since the global financial crisis. In the past three experiences, although the growth rate of the US economy declined in stages after exceeding 4%, the recovery process was not hindered, and the continuous bull market in the US stock market also reflected the increasing market confidence.
Figure 1 US economic growth Source: Wind
However, after the US economic growth rate exceeded 4% this time, along with the decline of growth rate (the growth rate in the third quarter was 3.5%), the three major US stock indexes have successively ended the bull market with unilateral rise in the past 10 years. The Nasdaq, the S&P 500 and the Dow have successively dropped from the peaks above 8100, 2930 and 26800, and hit a staged bottom in mid-December 2018, during which the three major stock indexes have fallen by nearly or more than 20%. In addition, the term spread of US debt continues to narrow. For example, the term spread of 10-year US debt and 3-month US debt has dropped to 15BP at the lowest, while some terms such as 5-year and 2-year, 5-year and 3-year have been upside down. Therefore, unlike the previous three times, the market has begun to worry that the US economy may fall back into recession, and the expectations for the Fed’s interest rate hike process have also been greatly revised accordingly. At the just-concluded meeting on interest rates, the Federal Reserve indicated that it would adopt more flexible policy tools depending on the actual changes in the economic situation. If the economy is not good, it may "suspend interest rate hikes" and "slow down the contraction of the table". The dove signal released by its wording greatly exceeded market expectations. Many institutions in the market have predicted that the Fed will only raise interest rates once this year, and some even believe that the Fed will stop raising interest rates.
In the past five rounds of interest rate hikes, the average rate of interest rate hikes by the Federal Reserve was 290BP, and this round of interest rate hikes started in December 2015, and has raised interest rates nine times so far, with a cumulative rate of 225BP. So overall, the current round of interest rate hikes by the Federal Reserve is coming to an end, so what impact will it have on economic operation and financial markets after the change of the Fed’s interest rate hike policy?
Table 1 Six rounds of interest rate hikes by the Federal Reserve Source: Wind. As of December 2018, the Federal Reserve has raised interest rates nine times since December 2015.
Observing the changes in the US economic operation and financial market after the Fed’s interest rate hike cycle in the past five rounds, we can find that:
1. After the Fed ends raising interest rates, it will not obviously boost American private investment and household consumption. The ISM manufacturing PMI index has declined, and the Michigan consumer confidence index has rebounded briefly twice, but then it has also dropped.
2. After the Fed ended raising interest rates, inflation did not increase significantly, but the overall rate dropped slightly; However, the unemployment rate has rebounded slightly, that is, the Phillips curve is still valid in the United States.
3. After the Fed ended raising interest rates, only one US stock fell, and the other four US stocks all rose; The yield of 10-year US bonds only rose once, and the other four times all fell, that is, the end of interest rate hike is good for the stock market and bond market.
4. After the Fed ended the interest rate hike, the change of the US dollar index was also divided, that is, the correlation between the Fed’s interest rate hike cycle and the trend of the US dollar index was not strong.
On the whole, with the end of the Fed’s interest rate hike cycle, the financial market will surely get favorable support, but no matter investment, consumption, employment or inflation, there has been no obvious change.
Table 2 Economic and market situation one year after the Fed stopped raising interest rates Source: Wind
Figure 2 Economic indicators and market trends since the Fed raised interest rates this round.
Source: Wind
Since the Federal Reserve started this interest rate hike cycle in February 2015, up to now, in addition to the volatile trend of the US dollar, other economic and market indicators have also released the strong information of the US economy. It is expected that there will be no recession in the US economy this year, but if the Federal Reserve really suspends interest rate hikes, it will definitely be beneficial to the financial market.
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