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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.
The Crypto market usually also has a rough time in September. Bitcoin lost 12.7% in September 2021, 17.4% in 2020, 17.5% in 2018, 21.4% in 2017 and 45.4% in 2015. The main cryptocurrency increased by 13.3% and 3.95% in 2016 and 2019, respectively.
What happened? Warren Buffett, the American businessman and philanthropist, has put most of Berkshire Hathaway’s cash in short-term United States Treasury bills since they offer as much as 3…
The e-commerce giant has recently faced a lot of pressure, starting from global uncertainty in China amid lockdowns and geopolitics. The company has been added to the US SEC (Securities and Exchange Commission) delisting queue. Finally, there’s an earnings report coming on August 4. Let’s discuss everything and prepare for the next move.
Inflation in New Zealand is the highest since 1990, edging to 7.3% in Q2 2022. The currency is under heavy pressure as the Reserve Bank of New Zealand is trying to reverse the inflationary spiral. The week ahead will give us a valuable clue about the country’s monetary policy, and we are here to talk about that.
In the middle of September 2022, the Canadian dollar has fallen to a 2-year low against the USD.
The US dollar index has all chances of reaching the 2000s high of 120.00.
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