What will it be like for the Fed to raise interest rates in March 50bp?

Should US stocks and Treasuries clear their positions or hold and pray? Although the probability that the market expects to raise interest rates 50bp in March has risen to nearly 80% after the January inflation data, after all, the last time the Fed raised interest rates 50bp was as far away as 2000, so if the Fed does raise interest rates in March, it is not because the market expects too much, but because the Fed finally realizes that the original offer is not enough.

So between now and the silence period of the March meeting, if more and more Fed officials change their tune to support the March 50bp hike, this scenario will no longer be a tail risk.For now (as of February 10, 2022), the only Fed officials who support the March 50bp hike are Brad the big hawk, while others either oppose it or think it is premature and need economic data to prove it.

We think the next stepPay close attention to the statements of Fed officials, especially Powell's testimony when he submitted his semi-annual monetary policy report to Congress at the end of February and the February inflation data to be released a week before the March interest rate meeting.If we find a unanimous shift in the tone of Fed officials, we are likely to see a Fed rate hike rarely seen in more than 30 years.

Taking history as a guide, how have the economy and assets performed when the Fed raised interest rates 50bp in history?

There have been five interest rate hikes exceeding 50bp in the four interest rate hike cycles since 1990, focusing on the two interest rate hikes from February 1994 to February 1995 and from June 1999 to May 2000.But none of the five operations is the first in the interest rate hike cycle. Emergency interest rate hikes and interest rate hikes above 50bp since 1990 are the result of rising demand for jobs and rising inflationary pressures under strong economic activity.

After the emergency interest rate increase 25bp in April 1994, the rate increase accelerated in May 50bp:

Economic fundamentalsAfter the recession in the early 1990s, the economic recovery of the United States increased significantly in 1994. Although the severe cold has suppressed some consumption and investment demand, capacity utilisation has risen further. After the bad weather, the number of new non-farm jobs 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 per cent in April. On the other hand, bond and stock prices have fallen sharply after the previous two interest rate hikes, and the Fed believes that speculative sentiment has diminished and financial markets are unlikely to overreact to interest rate hikes; even if interest rates continue to rise, the US economy will be able to maintain high growth momentum during the year. As a result, the Federal Reserve urgently raised interest rates 25bp in April 1994, and sharply raised interest rates 50bp at the subsequent interest rate meeting.

资In terms of property performance, the acceleration of interest rate hikes by the Federal Reserve in 1994 led to a sharp rise in US bond yields, but did not lead to a sharp fall in US stocks.On the stock market, after the first two interest rate hikes, the S & P 500 has fallen 9% by the beginning of April 1994, although the Federal Reserve raised interest rates 50bp in May, August and November respectively. Us stocks have made periodic adjustments after raising interest rates, but the overall situation is in shock. The yield on 10-year Treasuries rose sharply over the same period, with the biggest increase of the year to 80bp.

The Federal Reserve raised interest rates 50bp in May 2000, the last time in this tightening cycle:

Economic fundamentalsAt that time, the rapid development of information technology fuelled the US economic boom, unemployment fell to a low, and the rise in the price of crude oil and other commodities led to the resurfacing of inflation risks. CPI rose to 3.8 per cent in March 2000, but rising labour costs from March to May suggest inflationary pressures are likely to rise further, with inflation expectations rising further above 3.0 per cent. In addition, the rapid expansion of aggregate demand has exceeded potential supply levels, and there are signs of further tightening of resources such as labour. In view of these circumstances, after raising interest rates 25bp five times between June 1999 and March 2000, the Fed decided in May to raise interest rates by 50bp to 6.5 per cent, thus ending the current cycle of interest rate hikes.

This wave of Fed interest rate hike 50bps not only ended the interest rate hike cycle, but also ended the "science and technology bubble".After raising interest rates 50bp, US stocks fell 5% in nearly half a month, rebounded and fluctuated sideways in nearly 4 months. Finally, due to the weakness of the US economy and a significant decline in the profitability of listed companies, US stocks entered a bear market. Us bond interest rates rebounded only slightly within a few days after the announcement of an interest rate hike, with a total decline of nearly 130bp in six months against a backdrop of declining economic fundamentals and weaker stock markets. The US economy entered a recession in March 2001.

As a lesson from history, if the Fed raises interest rates by 50bp, we think 2022 will be more like 1994, but high stock market valuations are a hidden danger.An important reason why the Fed accelerated interest rate hikes in 1994 and 2000 led to very different stock and bond performance is that it was in the early stage of the economic upward cycle in 1994 and late in 2000. In terms of the economic cycle, the scenario of raising interest rates in 2022 50bp will be more like 1994, butThe high valuation of the stock market is an important hidden danger, which means that the Fed's interest rate hike in March 50bp is likely to lead to further adjustment of US stocks.The rise in 10-year Treasury yields will also stall and repeat periodically.

RiskTip:The spread of the epidemic exceeded expectations, and the policy hedged against the economic downturn was not as effective as expected.