On March 16, 2022, the Federal Reserve’s FOMC Committee approved a 0.25 percentage point rate hike, the first increase since December 2018. Officials indicated an aggressive path ahead, with rate increases projected for each of the remaining meetings in 2022. On May 4, the Fed took its first step on that path by raising rates a half percentage point, marking its sharpest increase since 2000.
Over the prior 30 years, the Fed has initiated four distinct tightening cycles. A tightening cycle is defined as a period when the Fed increased the federal funds rate multiple times.
Fed tightening cycles, 1994–2018
| Cycle | Number of rate hikes | Starting Fed Funds Rate | Ending Fed Funds Rate | Cycle duration |
|---|---|---|---|---|
| 2/4/1994–2/1/1995 | 7 | 3.00% | 6.00% | 12 months |
| 6/30/1999–5/16/2000 | 6 | 4.75% | 6.50% | 11 months |
| 6/30/2004–6/29/2006 | 17 | 1.00% | 5.25% | 24 months |
| 12/17/2015–12/20/2018 | 9 | 0%–0.25% | 2.25%–2.50% | 36 months |
Sources: Federal Reserve Board, Putnam.
In the sample period, the median number of Fed rate hikes is 8 and the median time frame is 18 months, from the first hike until the final hike. Fed policy actions likely caused, or contributed to, economic recessions following the cycles ending in 2000 and 2006.
Market performance
Markets have tended to trade lower in the months following the start of a tightening cycle, but in each case have ended higher one year later.
S&P 500 performance
Sources: Bloomberg, Putnam.
The median drawdown is observed to be 9% in the first 49 days following the Fed’s first rate hike.
Size and style performance one year following the Fed’s first rate hike
Sources: Bloomberg, Putnam.
Putnam Large Cap Value strategies
Invest in large-cap value stocks, dividend growers, and cash-flow generators with a strategy that defines the value universe every day – including stocks that represent non-traditional value.
Asset class returns across equities and fixed income one year after the Fed’s first rate hike
One year following the Fed’s first rate hike, returns across all risk asset classes analyzed are positive. Excluding the TMT bubble of 1999–2000, the strongest returns in the equity space were found in the Russell 1000 value index. Similarly, the strongest returns in the fixed income space were found in U.S. high-yield bonds.
Sources: Bloomberg, Putnam.
2022 and beyond
What can we learn as the Fed begins its fifth tightening cycle in the last 30 years? In the prior four cycles, it is fair to say that the Fed contributed to the recessions following the TMT bubble (2000) and the housing bubble (2006). There were no recessions after the tightening cycles of 1994 and 2015.
- The median number of rate hikes was eight, spanning a median of 18 months.
- Following the Fed’s first rate hike, the S&P 500 declined by a median of 9% over 49 trading days.
- One year after the Fed’s first rate hike, the S&P 500 was 6.24% higher at the median.
- Within the equity space, the Russell 2000 Index (small caps) generated a median return of 11.30%, significantly outpacing the returns of large-cap indices such as the S&P 500 and the Russell 1000 growth and value measures, excluding the TMT bubble.
- When we exclude the run-up to the TMT bubble, the Russell 1000 Value Index had the highest median return at 11.82%.
This information is for investment professional use only and is not meant for distribution.
For informational purposes only. Not an investment recommendation.
The views and opinions expressed are those of the authors, are subject to change with market conditions and are not meant as investment advice.
Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.
ICE Data Indices, LLC (ICE BofA), used with permission. ICE BofA permits use of the ICE BofA indices and related data on an “as is” basis; makes no warranties regarding same; does not guarantee the suitability, quality, accuracy, timeliness, and/or completeness of the ICE BofA indices or any data included in, related to, or derived therefrom; assumes no liability in connection with the use of the foregoing; and does not sponsor, endorse, or recommend Putnam Investments, or any of its products or services.
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approve or endorse this material, or guarantee the accuracy or completeness of any information herein, or make any warranty, express or implied, as to the results to be obtained therefrom, and to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
329917 5/22