Investing 101: What might happen after the end of a US interest rate hiking cycle

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Interest Rates And The Fed

The Federal Reserve (‘Fed’) sets the central fed funds interest rate for the US economy with the aim of maximizing economic growth while adhering to a dual mandate of low and stable inflation and maximum employment. Decisions on rate adjustments are made with reference to a variety of key economic indicators.¹

Changes in interest rates affect asset classes differently. We explore how the end of a hiking cycle might affect fixed income and equities. We explore how the end of a hiking cycle might affect fixed income and equities.

What Happens When Hikes End?

Over the last 50 years eight notable interest rate hiking cycles took place. In each of these periods, the fed funds rate hit a peak before hikes were paused and subsequently cuts began.

The time between the last hike in a series and the first cut, ranged from 15 months in 2006 to 1 month in 1984, with an average pause of 7 months between the last hike and the first cut.

Fixed Income After Rate Peaks

Fixed income has a direct relationship with interest rates. While yields move in tandem, prices have an inverse relationship – as interest rates are decreased, bond prices tend to rise, leading to greater total returns.

On the next page, we show the total returns for the Bloomberg US Treasury Index over the 24 months following the last interest rate hike of a series. In all instances, Treasuries showed positive total returns over the period.

Total returns for the index were greatest following the 1981 and 1984 interest rate peaks, where the starting yields were also high: 14% and 12.5%² respectively.