Fed Tightening Mirrors 1994 and 1999 Cycles Amid AI Capital Spending

Since 1994, there have been six modern Federal Reserve tightening cycles. Of these, two stand out, the 1994 and 1999 episodes. These cycles began with policy settings close to neutral rather than at the zero lower bound.

In both instances, the U.S. two-year yield kept rising after the first hike, and the dollar index fell. The 1999 cycle was notable because it took place during a technology investment boom, with the Federal Reserve tightening after delivering insurance cuts. This combination is being revisited as artificial intelligence capital spending builds.

The comparison between these cycles and the current situation is relevant because it shows that rising front-end rates can be a weaker dollar signal in cycles that begin from normal policy settings rather than emergency settings.

David Scutt, Senior Market Analyst for Global Macro at StoneX Media, notes that the 1999 cycle was unique due to the large wave of capital spending on technology. This led to a divergence between front-end rates and the dollar index, as capital flowing into domestic investment does not behave like capital chasing yield differentials.