The Federal Reserve has not raised key interest rates for a long time. The last time it raised rates was on June 29, 2006. After that, beginning in the third quarter of 2007, it started to cut rates and since December 2008, it has kept the Fed Funds rate between 0-0.25%. Now the Fed is giving hints that it is getting ready to raise rates.
There are many experts who are predicting that the Fed is keeping the options open to raise rates in June 2015. Then there are others who are saying that Fed should not raise rates now. Whether the Fed raises the rates now or later is not assured but there is no denying that the hour of reckoning has come closer.
So let’s see what happens when the Fed starts to raise rates. Usually, when Fed raises rates after a long break it hikes them few times before stopping. Whether that will be the case this time too is not certain. So we will look at the performance of the equities, dollar and bonds before and after the first Fed Fund rate hike.
Since 1992, Fed has started the rates increase only four times. In February 1994, it started a rate-hike spree that took the rates from 3.00% to 6.00% by February 1995 in seven steps. In March 1997, it raised rates only once. Between June 1999 and May 2000, the Fed raised rates six times to 6.50% from 4.75%. Between June 2004 and June 2006, the Fed raised rates 17 times, taking the benchmark to 5.25% from 1.25%.
Post-Hike
This is how S&P 500, 30-Year US Treasury Bonds, and the dollar index fared over a four-week, 13-week and 26-week periods after each of these rate-hike streaks starting from the first rate hike.
Some noticeable trends are:
- S&P 500
- It has always declined in the 4-week period after the first rate hike
- The bias over a 13-week period is to the downside; whereas the bias over a 26-week is to the upside
- Dollar Index
- It has always declined over a 13-week period after the first rate hike
- Its bias over a 26-period is to the downside
- Bonds have a downside bias over the 4-week period after the first hike
| S&P 500 | |||
| Start Year | 4 Wks |
13 Wks |
26 Wks |
| 1994 | -(1.1)% | -(4.7)% | -(2.7)% |
| 1997 | -(1.8)% | +13.6% | +20.6% |
| 1999 | -(0.5)% | -(7.6)% | +6.6% |
| 2004 | -(4.0)% | -(2.3)% | +6.4% |
| 30-Year Treasury | |||
| Start Year | 4 Wks |
13 Wks |
26 Wks |
| 1994 | -(3.6)% | -(10.8)% | -(10.3)% |
| 1997 | -(0.5)% | +3.2% | +6.3% |
| 1999 | -(0.0)% | -(2.5)% | -(5.0)% |
| 2004 | +0.4% | +5.9% | +4.4% |
| Dollar Index | |||
| Start Year | 4 Wks |
13 Wks |
26 Wks |
| 1994 | -(2.0)% | -(4.4)% | -(7.6)% |
| 1997 | +1.2% | -(0.3) | +3.2% |
| 1999 | -(2.3)% | -(4.0)% | -(0.9)% |
| 2004 | +1.1% | -(0.8)% | -(8.9)% |
Pre-Hike
Following is how S&P 500, 30-Year US Treasury Bonds, and the dollar index fared over a four-week, 13-week and 26-week periods leading up to the first hike.
Some visible trends are:
- S&P 500
- It has always appreciated over a 13-week and 26-week period leading up to the first rate hike
- Dollar index
- It has always appreciated over a 13-week and 26-week period leading up the first hike
- It bias over a 4-week before the rate hike is to the upside
- Bonds
- They always decline over a 13-week period leading up to the first rate hike
- Their bias for other periods is to the downside
| S&P 500 | ||||
| Start | 4 Wks |
13 Wks |
26 Wks |
|
| 1994 | -(0.0)% | +2.2% | +4.7% | |
| 1997 | -(2.8)% | +5.1% | +15.1% | |
| 1999 | +6.0% | +6.7% | +11.4% | |
| 2004 | +1.4% | +1.3% | +2.6% | |
| 30-Year Treasury | |||
| Start | 4 Wks |
13 Wks |
26 Wks |
| 1994 | -(1.0)% | -(0.5)% | -(0.4)% |
| 1997 | -(3.4)% | -(4.1)% | +0.1% |
| 1999 | -(0.6)% | -(3.8)% | -(9.2)% |
| 2004 | +2.1% | -(6.7)% | -(2.7)% |
| Dollar Index | |||
| Start | 4 Wks |
13 Wks |
26 Wks |
| 1994 | +0.5% | +2.0% | +2.8% |
| 1997 | +1.0% | +7.5% | +9.9% |
| 1999 | -(0.3)% | +2.6% | +8.3% |
| 2004 | +0.1% | +1.2% | +2.0% |
