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The last time the US Federal Reserve raised interest rates by 75 basis points, there was a Democratic president in his second year in office, and the stock market had just enjoyed two booming years of solid gains. It's not much different than now, except that in 1994, there were no growing fears of a recession, and there was no terrifying, uncontrollable inflation.
In November 1994, Alan Greenspan, the-then Fed's chairman, announced a rate hike after leaving rates unchanged throughout 1993 to fight rising inflation before accelerating. From 3.25% in January 1994, rates rose all year long, even jumping 75 basis points in November. The increase was part of a series of rate hikes by seven times over 13-months between early 1994 and early 1995 to keep the economy from overheating.
In 1994, this move was confusing to the markets, especially to the Clinton White House. Inflation was at its lowest level in 20 years, 2.7%. But with the US stocks booming strongly, the Fed felt the first degree of heat in the economy and feared rising inflation. So the hawkish Fed chose to raise rates preemptively, to the point that critics of the move said it did not allow the economy to flourish. The Fed may have cut the road off a larger economic boom in the bud.
In 2022, Jerome Powell, the current Fed's chairman, finds himself in a very different situation. He is trying to fight the fires already burning throughout the US economy. Inflation has reached 8.6%, its highest level in 40 years. There are now concerns that prices will take longer than expected to calm, even with the Fed raising rates aggressively. Let's not forget the sharp collapse in the US stock market, entering a bear market after declining by more than 22% during the year. Fears of a recession are also growing.
Everyone now fears that the Fed will hit the brakes too hard and too quickly to tame inflation, but it will halt the economy. Powell wants a soft landing for inflation, as Greenspan did in 1994. But it looks like he will get a hard landing.
Back days, economists believed that Greenspan's tightening drove the US into a soft landing, calming markets and inflation while avoiding the recession that often comes from sharp and sudden increases in rates. Today, there is a big difference from the successful "soft landing" of 1994-1995, which is where the Fed currently stands.
Unlike the Fed in 1994, which was one step ahead of inflation, the Fed should have started raising rates gradually in early 2021 with the early signs of inflation. However, it had continued stimulating the economy with 0% interest rates, ongoing monthly bond purchasing, and pumping trillions of cheap dollars into the markets rather than withdrawing them and starting to tighten before it was too late.
Markets are now concerned that the Fed's aggressive approach to inflation could push the economy into recession. In 1994, stock losses were minimal during the year (down only 1.2%), and the Fed managed to avoid a recession and cool inflation. The Dow Jones rose more than 33% in 1995. In 2022, stocks are down more than 22% so far. The Dow Jones fell below the key 30,000 level after raising rates by 75 points last week.
In a call scheduled for January 25, 00:30 am GMT+2, Microsoft will publish the company's earnings for the final quarter of 2022 and comment on the results, projections, and outlook for the nearest future of the company.
In a call scheduled for January 25, 00:30 am GMT+2, the Tesla Inc. team will publish the company's earnings for the final quarter of 2022 and comment on the results, projections, and outlook for the nearest future of the company.
The Netflix stock (NFLX), with a market cap of $145.17B and a whooping 10 000+% rise since its inception 16 years ago, experienced some turbulence for a short period last year while trading around the $250 share price. However, the NFLX stock quickly recovered and rose to over $300 towards the end of the previous quarter of 2022.
On Thursday, the 2nd of February, the Bank of England will publish its report concerning interest rates and inflation data for the Eurozone. Professionals and investors anticipate that Andrew Bailey’s lead team of policy makers will likely raise interest rates to 4%; the highest in over a decade, for the tenth time in a row.
The first FOMC meeting comes after a buildup of anticipation from traders and investors alike, as the markets await what posture the Fed will take regarding the interest rates; would there be a hike or a cut in interest rates? Recall that the Federal Open Market Committee had previously ended the year 2022 with a 50bps hike, and an indication from Powell, the committee chairman, that the Fed could consider raising interest rates by 75bps in the course of the year 2023.
Western countries are trying to find other options for oil and gas supplies after a 10th package of sanctions, which will put more pressure on Russian oil and decrease global oil supply. Italy, for example, is in talks with Libya.
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