The Federal Reserve’s recent decision to pause its monetary-tightening campaign after 15 months of consecutive interest rate hikes has brought some stability to the financial markets. Throughout this period, the central bank’s actions fueled significant volatility in stocks, bonds, and cryptocurrencies. In this blog post, we will analyze the impact of the Federal Reserve’s rate hikes on these three asset classes and explore the ensuing market chaos depicted by five informative charts.
15 Months of Rate Hikes:
Starting in March 2022, the Federal Reserve initiated a series of interest rate increases to combat soaring inflation. This aggressive tightening cycle, the fastest in four decades, raised borrowing costs from near-zero to over 5% across ten consecutive meetings. However, this campaign seems to have yielded positive results, as inflation has declined from nearly 9% to 4% over the past year.
Stock Market Chaos:
As the Federal Reserve raised interest rates, stocks experienced significant volatility. Higher rates made savings accounts more appealing, diverting investments away from stocks. Consequently, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all experienced sharp declines. The tech-heavy Nasdaq even entered a bear market, plummeting over 20%. However, the anticipation of future rate cuts to support the economy and the growing popularity of artificial intelligence stocks contributed to a subsequent rebound, bringing the indices close to their pre-hike levels.
Regional Lenders’ Stock Price Crashes:
One notable casualty of the Federal Reserve’s rate hikes was the share prices of regional lenders. The collapse of Silicon Valley Bank, followed by the struggles of First Republic, PacWest, and Western Alliance, resulted in significant losses. These institutions saw their market capitalizations severely impacted, with some experiencing declines of over 50%.
Bond Yields Spike:
When interest rates rise, bond prices tend to fall, prompting investors to seek higher returns elsewhere. In September, global bonds entered their first bear market in a generation as central banks worldwide struggled to keep pace with the Federal Reserve’s tightening campaign. US Treasurys were not immune to this trend, with yields on 2-year and 10-year notes rising around 200 basis points since March 2022.
The Federal Reserve’s rate hikes also affected the cryptocurrency market. As borrowing costs increased, investors had less cash to allocate to risky assets like Bitcoin and Ethereum. Both cryptocurrencies experienced significant declines, with prices currently trading at approximately 60% below their all-time highs reached in November 2021. Bitcoin is currently valued at nearly $26,000, while Ethereum sits just above $1,700.
The Federal Reserve’s decision to pause its monetary-tightening campaign brings a temporary respite to the financial markets after a period of intense volatility. Stocks, bonds, and cryptocurrencies all faced challenges as the central bank aimed to control inflation. However, the subsequent rebound in stock indices and the stabilization of bond yields suggest that the market is responding positively to the Fed’s actions. Investors will continue to monitor the central bank’s future decisions to gauge their impact on these asset classes.