Quick Thoughts: The Fed Returns to Hiking—What Now?

The Fed’s new hiking cycle should bring near-term volatility but may create opportunities for diversified equities and bonds, unless rate increases become prolonged enough to damage the economy.

• The FOMC raised rates by 25 basis points for the first time since 2023, as inflation remained above the Fed’s 2% target while the economy and labor market stayed resilient.
• Across the six previous hiking periods beginning in 1994, the S&P 500’s average maximum drawdown over the following 12 months was 12.2%, while its average three-month return was -2.3% and its average 12-month return was +8.7%.
• The 10-year US Treasury yield rose by an average of 26.5 basis points in the 12 months after the first hike, but the authors consider bonds attractive because starting yields are higher than in 2022.
• Franklin Templeton has favored shorter-duration bonds, while higher current and prospective rates make core and core-plus bond mandates more attractive.
• The cycle’s duration is critical: the hiking cycles that began in 1999, 2004 and 2022 ended with economic or market damage, whereas the one-off 1997 hike was followed by a 39.8% 12-month S&P 500 return.

Takeaway: Investors should expect volatility and use equity selloffs to rebalance and add diversified exposure, while considering bonds across the duration spectrum; the main risk is that further hikes become prolonged and break economic conditions.