Fed Rate Increases 75 Basis Points | News or Noise

Last week, the Federal Reserve announced they were raising the short-term interest rate they control by 75 basis points. This announcement is just one month after Chairman Jerome Powell said the Central bank was not actively considering raising interest rates by three-quarters of a percentage point to fight inflation.

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources, and ask, “Is it News or Noise?” for your investment portfolio. This week’s topic is the Fed raising short-term interest rates by 75 basis points.

On Wednesday of last week, the Federal Reserve raised the Fed Funds rate by 75 basis points in order to fight inflation. A month ago, they said they were not considering that much of a raise, but after Fridays, June 11th consumer price index report showed that inflation is rising faster than expected, they changed their tune fast and leaked 75 basis points to the press early in the week.

Many TV analysts expressed alarm at the size of this move stating this is the “First time since 1994” that the Fed has made such a move. Bringing up a date almost 30 years ago, as if it was so long ago, it must have been bad for markets. I don’t know if it will be bad for the markets over the coming 6 to 12 months, as the S&P500 is already in bear market territory, but they are hiking short-term rates into an economic slowdown to combat inflation.

However, I do know that back then, in 1994, Alan Greenspan, hiking rates by 75 basis points did precisely what it was supposed to. He raised rates seven times by 3-6% in 1994. In November 1994, Alan Greenspan, the then-chairman of the Federal Reserve, announced a rate hike from 4.75% to 5.5%. Under Greenspan, the Fed had been slowly tightening the screws. He was able to affect a soft landing in the economy by tightening monetary policy and slowing inflation to keep the economy from overheating.

In 1994, stocks dropped about -10% during the first half of the year as inflation rose early in the year. However, stocks ended the year only slightly negative for the full year down around 2%. Back then the Fed was able to avoid a recession, and stocks rebounded by 34% in 1995. Yes, rallied 35% over the next year. What’s more, after the rate hike in November 1994, stocks dropped only slightly before rebounding ahead of another rate increase in February 1995, according to data from CFRA Research. Here’s the historic chart in 1994. Let it sink in for a bit.

Will history repeat? I do not know, and there are no guarantees in the stock markets; however, investor sentiment, positioning, and expectations drive stock prices well in advance of what most readers are seeing on TV or are reading in newsletters, and many of these alarmist headlines often leave out the punchline because it doesn’t suit their bias. In this case? Those stories had a negative bias. The scare tactics of bringing up 1994 as a data point. Yes, It’s news because back then, the 75-basis point increase by the Fed marked the lows in the stock markets for the next 15 to 18 months, not the highs as many on TV would lead you to believe.

News or Noise: News

At Oak Harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future is always uncertain and that’s why our advisors and retirement planning teams, plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040, and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.

I’m Chris Perras and from everyone here at Oak Harvest Have a blessed week.