At present, the consensus on Wall Street of those who expect the Fed to hike rates points toward a relatively modest tightening campaign, with many economists expecting only a single rate increase—possibly as soon as September—before the Fed pauses to reassess economic conditions.
Historic analysis suggests that how quickly the Federal Reserve raises interest rates can be just as important as the hikes themselves.
The pace of rate increases can be classified as follows:
a. Rapid Cycle
b. Slow Cycle
c. Non Cycle
A rapid tightening cycle occurs when the Fed raises rates at a cadence of more than once every two meetings, on average.
A gradual or slow cycle features longer intervals between hikes, while a limited or non cycle consists of only one or two increases before the Fed pivots back toward easing.
Historically, the market has responded very differently to each scenario. Aggressive tightening cycles have been the least favorable for equities, with the S&P 500 posting an average decline of roughly 3.6% during the first year following the initial rate increase. Stocks have generally struggled most during the early phase of these faster tightening campaigns.
By contrast, markets have fared considerably better when the Fed has moved at a more measured pace. During gradual tightening cycles, the S&P 500 has historically gained about 10.5% over the year following the first hike, while limited tightening cycles have produced average returns of approximately 11.5%.
Sector leadership has also differed. Faster tightening periods have tended to favor more defensive areas of the market while reducing the performance of cyclical and growth-oriented sectors. Slower and shorter tightening cycles, on the other hand, have generally provided a more constructive backdrop for broader equity leadership. https://t.co/JXzFFTmMtn
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