What Investors Spot in the Fed’s Rate Hikes

When the Federal Reserve raises interest rates, one thing seems certain: a near recession.

The Fed does not intend to cause a recession. And officials will do anything to avoid it.

But history shows that higher rates almost always end in recession.

The chart below shows the rate of federal funds and the short-term interest rate that the Fed controls. Gray stripes emphasize a recession. Each time the Fed raised interest rates, a recession ensued.

Fed rate hikes: recession indicator

The rise in the pattern of immigration indicates a recession

The pattern is not random.

Higher rates make the loans less attractive for consumers and businesses. If consumers do not borrow money, many cannot afford items on large cards, such as new cars or home appliances. If businesses do not borrow money, many cannot afford to expand.

Without consumer demand, businesses are less likely to expand. Higher rates make new projects for businesses less attractive.

Business expansion creates jobs. Without this loan, the number of jobs is reduced and contributes to the recession.

Recession is one reason Investors Do not like interest rate hikes.

Recession-related bear markets

The chart shows the Fed’s interest rate hike data since 1955. There were 11 bear markets during that time – not counting the current one.

Recessions occurred in parallel with eight of these bear markets.

On average, bear markets during a recession lost 36.5%. The three bears that occurred outside of the recession lost an average of only 27.9%. The steepest non-recession decline was 33.5%.

Five of the eight recession bears were worse than that.

Recession-related bear markets last longer. It took them an average of 432 calendar days to reach the bottom. This is more than twice the average of 179 days of non-recession.

The Bottom Line: If we are heading for a recession, we are less than halfway to the bear market. This is not good news for investors, but it is news they need to know.

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Michael Carrhe The editor of Masters of True Options, One Trade, Peak Velocity TraderandPrecision gains. He teaches technical analysis and quantitative technical analysis at the New York Financial Institute. Follow him on Twitter@MichaelCarrGuru.

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