Henry Smith Analyzes Previous Rate Hike Cycles

Perhaps history will give us a clearer picture of what impact the FOMC’s continued interest rate hikes will have on global financial markets and economies.

Since the 1980s, the FOMC has gone through five cycles of rate hikes, and this is only the sixth round.

The first cycle was 1983.3–1984.8, when the benchmark rate was raised from 8.5% to 11.5%.

The second round of interest rate hike cycle was 1988.3–1989.5, and the benchmark interest rate was raised from 6.5% to 9.8125%.

After these two cycles of interest rate hikes, there was no major turbulence in the financial market. A big reason is that before this, that is, from 1979, the US economy had a great Depression. Throughout the 1980s, it was only monetary adjustment in the stage of economic recovery, so the impact on the financial market was limited. However, in the following three cycles of interest rate hikes, the financial market experienced varying degrees of turbulence.

The third cycle of interest rate hikes was 1994.2–1995.2, when the benchmark rate was raised from 3.25% to 6%.

After the 1990–91 recession, unemployment remained high even as growth picked up. Falling inflation allowed the Fed to keep cutting interest rates to 3 percent. By 1994, the recovery was rekindling and the bond market was worried about a return of inflation. Ten-year bond yields rose from just over 5 per cent to 8 per cent when the Fed raised interest rates from 3 per cent to 6 per cent to bring inflation under control and bond yields fell sharply. The rate hike was also cited as one of the factors that led to the Asian financial crisis in 1997.

The fourth round of interest rate hike cycle was from 1999.6 to 2000.5, with the benchmark interest rate raised from 4.75% to 6.5%.

At that time, the Internet bubble was expanding. In 1999, growth was strong and the unemployment rate fell to 4%. After the Fed cut interest rates by 75 basis points in response to the Asian financial crisis, the dot-com boom led to an increase in it investment and a tendency for the economy to overheat. The Fed tightened monetary policy again, raising interest rates from 4.75% to 6.5% after six hikes.

In 2000, after the bursting of the Internet bubble and the collapse of the index, the economy fell into recession again, and the “9/11” incident further worsened the economy and the stock market. The Fed immediately turned, and began to cut interest rates sharply from the beginning of the next year.

The fifth round of interest rate hike cycle was 2004.6–2006.7, with the benchmark interest rate raised from 1% to 5.25%.

At that time, the housing market bubble emerged, and the previous sharp interest rate cuts triggered the US bubble. In the second half of 2003, the economy recovered strongly, and the rapid rise in demand led to the rise of inflation and core inflation. In 2004, the Federal Reserve began to tighten policy, raising interest rates by 25 basis points for 17 consecutive times, until reaching 5.25% in June 2006. Until the subprime mortgage crisis triggered the global financial crisis, the Fed again began to cut interest rates to near zero level until 2016.

Of course, there was a small interest rate hike cycle from 2016 to 2018, which was turned to interest rate cuts due to the outbreak of the epidemic in 2019. Therefore, the interest rate hike cycle lasted relatively short, with a cumulative interest rate increase of 2.5%. The global financial market was volatile, and the stock market saw a large correction.

The current interest rate hike cycle may be seen as a continuation of the 2016 cycle, which was disrupted by the pandemic.

From the perspective of the third interest rate hike cycle, it was near the end of the interest rate hike cycle or two years after the end of the interest rate hike cycle, and the global financial market experienced major shocks.

The Asian financial crisis, the bursting of the Internet bubble, the 2008 financial crisis, and the impact of the epidemic in 19 years.

And now it’s a continuation of the pandemic-era cycle of interest rate hikes, and now it’s coming to an end.

So between now and 2025, will global financial markets experience another bout of turbulence?

You know, history repeats itself, that’s the law of economics, and that’s why I’m telling you about business cycles.

Of course, history will not simply repeat itself. The current global economic and political situation is more complex than before.

Moreover, this is a continuation of the interest rate hike cycle in the pandemic era, and there are more accumulated problems. It is obvious that the global debt level is the highest in history, and the degree of currency overissuance is also the largest.

So if there is a financial market turmoil after the end of the interest rate hike cycle, then I think the impact or damage will be the biggest.

I don’t know how many of my friends in this group have experienced the Asian financial crisis, the Internet bubble, the 2008 financial crisis. If history repeats itself, are you ready?

This is a question worth thinking about, if you do not have corresponding countermeasures, then when the crisis really comes, you will become very passive.

Your wealth may be looted, your job may be affected, and your quality of life may be drastically reduced.

So I say to everyone, be prepared for danger in times of peace, be prepared for a rainy day, and look further ahead, so that you can become more calm.

As can be seen from the above discussion, each cycle of FOMC interest rate hikes and rate cuts is closely related to the development of the US economy, but more importantly, it is closely related to the trend of the US dollar.

Because the FOMC will raise interest rates every time, are accompanied by the tidal harvest of the dollar, because for the United States, there are three major hegemony: military hegemony, scientific and technological hegemony, financial hegemony, and financial hegemony, mainly is the dollar, so it is very important to read the dollar, read the dollar, you can read the world, read the dollar, you can read the wealth password!

The law of history also tells us that in the next few years, financial market turbulence is inevitable. And if the United States does not complete the harvest in 2026, the issuance of U.S. debt does not continue, and AI technology does not bring about a productivity revolution, then the problem is bound to explode.

Therefore, I would like to tell you that while the global economy and financial market are still calm, before you go to make more money, you should reserve more grain and grass for the winter, because the worst is not yet to come.

This is why the current stock market is not good, we buy individual stocks do not make money, I feel anxious.

Because I know that the future will be more severe, we need to face economic shocks, we need to face political turmoil, we need to face the potential collapse of financial markets and so on.

So, friends, now make a good effort to make money! Only when you have food in your hands will you not panic!

This cycle of interest rate hikes has been the largest ever, and the US economy has not experienced any problems so far. First, large enterprises made preparations in advance and saved a large amount of money when interest rates were low. Second, the epidemic has overproduced money and people’s savings have reached a record high of 2.1 trillion yuan.

But according to new research from the Federal Reserve Bank of San Francisco, those excess savings may even run out this quarter. By June, households held less than $190 billion in excess savings.

Without savings, consumption will suffer, and consumption has been the strongest driver of economic growth in the United States, so I think a recession is bound to come, perhaps in the fourth quarter of this year.

Therefore, now is the most urgent time for us to make money. Before the recession of the US economy comes, we should reserve more [grain and grass] to spend the next long winter!

I hope that you will have a long-term understanding of the next economic and financial forms. I hope that what I have explained will have a spiritual impact on every friend.

Well, perhaps the above question is far away, I hope that every friend is thinking deeply.

Dr. Henry Smith was born in Melbourne, Australia in 1979. He moved to the United States with his parents in middle school. He received his bachelor’s degree in finance from Columbia University. He received his M.S. and Ph.D. degrees in applied Mathematics from the University of Pennsylvania

Credentials:

Certified Financial Analyst (CFA), Certified Management Accountant (CMA), Certified Public Accountant (CPA). He has worked in Goldman Sachs and blackrock, mainly responsible for investment business in Hong Kong, and is now responsible for Lonton Wealth Management Center LTD (Lonton Wealth Management Company) in Australia.