This happened the last time the Federal Reserve raised interest rates by 75 basis points 28 years ago.

US Federal Reserve Chairman Jerome Powell speaks at a press conference on interest rates, the economy, and monetary policy actions, at the Federal Reserve Building in Washington, DC, on June 15, 2022 (Photo: Oliver Doolery/AFP via Getty Images)

  • The last time the Fed raised interest rates by this size was in November 1994.

  • Alan Greenspan raised prices 7 times over 13 months

  • The stock market declined slightly that year but recovered 34% in 1995

The Federal Reserve of the United States (the central bank) announced, on Wednesday, to raise the official interest rate by 0.75 points, the largest increase in 28 years, to fight hyperinflation.

With this increase – the third since the Federal Reserve began raising interest rates in March – the official interest rate for the world’s largest economy drops to a range of 1.5% to 1.75%.

In an official statement at the end of their two-day meeting, the Federal Reserve Board of Governors also announced that it expects to implement further rate hikes in the future.

Historic move by the Federal Reserve

The last time the Fed 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. Then-Fed Chairman Alan Greenspan raised interest rates seven times over a 13-month period, from 3% to 6%, between early 1994 and early 1995.

In 1994, stocks were slightly negative for the year (down only 1.2%), the Fed managed to avoid a recession and stocks rose 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 easy landing in 2022?

Stocks are already down 22% this yearAnd the While the Fed was tightening before inflation in 1994, today it is “struggling to catch up,” says James Stack, president of InvestTech Research and Stack Financial Management.

“The current biggest difference from the successful ‘soft landing’ of 1994-1995 is how unusually supportive the Fed is,” Stack argues, “and it’s basically sleeping.” “Where the Fed was supposed to start raising rates gradually early last year with signs of inflation, it has instead continued to stimulate the economy, with 0% interest rates and continued monthly bond purchases,” he adds.

By 1994, the Fed was raising interest rates to levels well above the annual change in consumer prices, says Sam Stovall, senior investment analyst at CFRA Research. “this time, inflation [aumentando a un ritmo] Much faster than interest ratesSo it’s a completely different situation where the Fed has to act more aggressively.”

Despite a host of negatives weighing on markets today, one positive is that the economy remains fairly strong, says Charles Lemonides, founder and chief investment officer at ValueWorks. “The biggest drawback is that conditions are so good that the Fed has to make them worse by cooling the economy, so it might be a position of strength similar to 1994.”

The note was prepared with information from EFE and Forbes Argentina

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