Everything You Need To Know About Rate Hikes

Posted by lplresearch

Wednesday, March 16, 2022

Today the Federal Reserve is widely expected to hike rates for the first time since December 2018 and we expect them to kick things off with a 25 basis point hike (0.25%), with three or four more hikes coming later this year.

What could happen next? “Investors need to remember that Fed rate hikes usually happen near the middle of the economic cycle, with potentially years left of gains in stocks and the economy,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, a year after the first hike in a cycle has been fairly strong, higher a year later the past six times.”

View enlarged chart.

Although last month a 50 basis point hike was priced in by more than a 90% chance according to fed funds futures (it has come down significantly), we remained in the camp the first hike would only be 25 basis points. Look again at the chart above and you’ll see the Fed rarely kicks off a new cycle of hikes with a 50 basis point hike. It is later in the cycle that tends see 50 basis point hikes or larger.

As we share in the LPL Chart of the Day, during periods of extended rate hiking cycles, stocks have done quite well.

View enlarged chart.

Four or five hikes this year sounds like a lot, but expectations are currently for more than six. Remember that we’ve seen many years that saw many rate hikes, as shown in the chart below, even as recently as 2018.

View enlarged chart.

Lastly, here’s how stocks have done in years with a lot of rate hikes. The mid-2000s cycle is what has our attention, as there were 17 total rate hikes in 2004, 2005, and 2006, yet the S&P 500 managed to gain in every year.

View enlarged chart.

The bottom line is rate hikes usually aren’t bearish events and we don’t expect this cycle to be any different.

For more on rate hikes and the latest with Ukraine and Russia, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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All index and market data from FactSet and MarketWatch.

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