Historical interest rate tightening cycles
Summary
The average rate tightening cycle has lasted 21 months with a total federal funds increase of 3.02%. Historically, long-term rates peak shortly before the Federal Reserve stops increasing short-term rates. Inflation may continue to climb well after the Fed curtails rate hikes.
Tightening cycles
There have been six full tightening periods since the Federal Reserve began targeting the federal funds rate as a policy lever in 1982. While the current cycle will have its own set of unique attributes – in particular higher inflation than any cycle in the last 40 years – it’s helpful to review similar historical periods.
Rate increases during the six previous cycles lasted between one and three years and totaled 1.75% to 4.25%. Applying historical increases to the current cycle would result in a peak fed funds target range between 1.75% and 4.50%.
| Start | End | Initial target rate | Ending target date | Increase | Duration (months) | Pace (bps/month) |
|---|---|---|---|---|---|---|
| 3/30/1983 | 8/9/1984 | 8.50% | 11.50% | 3.00% | 16 | 18 |
| 1/4/1987 | 2/24/1989 | 5.88% | 9.75% | 3.88% | 26 | 15 |
| 2/3/1994 | 2/1/1995 | 3.00% | 6.00% | 3.00% | 12 |
25 |
| 6/29/1999 | 5/16/2000 | 4.75% | 6.50% | 1.75% | 11 |
17 |
| 6/29/2004 | 6/29/2006 | 1.00% | 5.25% | 4.25% | 24 |
18 |
| 12/15/2015 | 12/20/2018 | 0.13% | 2.38% | 2.25% | 36 | 6 |
| Average | 3.88% | 6.90% | 3.02% | 21 |
17 | |
| Minimum | 0.13% | 2.38% | 1.75% | 11 | 6 | |
| Maximum | 8.50% | 11.50% | 4.25% | 36 |
25 |
Source: Federal Reserve Bank of St. Louis
After raising the fed funds target range by 25 basis points on March 17, and a further 50 basis points on May 5, the Fed is widely expected to hike by half a percentage point at both the June and July FOMC meetings. If they follow through on 50 basis point hikes in both meetings, this cycle will be on pace for the fastest tightening cycle in the past half century at 44 bps per month.
Long-term interest rates
The Federal Reserve directly intervenes in short-term markets to achieve target rates. It does not directly target rate levels in long-term bond markets. Historical review of 10-year Treasury yields shows that long-term rates consistently peak shortly before the Fed stops hiking short-term target rates.
Source: Federal Reserve Bank of St. Louis
Inflation
There is no clear, direct historical pattern between the fed funds rate and inflation. In half of the previous cycles, inflation peaked before the fed funds rate, and in half of the previous cycles it has continued to rise for years afterwards.
Source: Federal Reserve Bank of St. Louis
While previous cycles provide reference points, inflation is higher than any point in the last 40 years, global supply chains are strained, and geopolitical challenges abound. It’s important to evaluate portfolio performance under black swan scenarios that run beyond historical precedent. Ultimately, capital markets strategies should protect businesses against catastrophic risk in the event of unprecedented inflation and rate volatility.
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