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A short history of rate hikes

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As markets prepare for another 75bps rate increase from the Federal Reserve, Goldman Sachs have reviewed the historical rate-hike playbook for central banks in Group of 10 countries. It… isn’t entirely discouraging.

It goes a little something like this:
— hike until something breaks
— try to fix whatever broke by cutting rates

When it comes to the Fed, at least, the note appears to support the “pivot” that strategists and investors are expecting.

To summarise an October 30 note from the bank:
— Between 1960 and 2019, central banks of G10 countries have raised rates by a median of 200 basis points in the span of about 15 months.
— In three-quarters of those hiking cycles, central banks have taken a pause at some point in the process.
— The tightening has historically ended when inflation is still near its peak, and then central banks have started to cut interest rates seven months after the last rate increase.

As you may guess, however, there is significant variation between countries and over time.

The median hiking cycle in the US, for example, has lasted 25 months, compared to around 10 months for the UK:

One legitimate counterargument is that investors should only really compare the current round of rate increases to the 1970s, the last time inflation was this high. Goldman Sachs found that, on average, G10 central banks only raised rates by an average of 4 percentage points in the 1970s! So, will the pain of tightening soon pass?


The “average” was doing a lot of work there; as anyone with passing familiarity of the US in the 1970s will know, rates rose by more than 8 percentage points during the Volcker shock.

And historically the Fed doesn’t wait for inflation to come down significantly, Goldman Sachs finds:

But at least when the US finishes raising rates, it cuts rates relatively quickly:

This is usually because there’s a recession, of course, but GS doesn’t use that word anywhere in its note.

Don’t want to be a downer the week that the Phillies are in the World Series, after all.

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