Federal Reserve Sparks Rate-Hiking Cycle Amid Inflation Concerns

The Federal Reserve has raised interest rates for the first time since 2023, marking the start of a new rate-hiking cycle. This move aims to combat inflation, which has been rising above the Fed's target of 2% annualized price increases.

According to historical data, most rate hiking cycles have led to significant drawdowns in the S&P 500 within 12 months. The average drawdown for the index after the first rate hike is around 14%, with a notable exception being non-cycles where rates only rise slightly before pausing.

The Fed's dot-plot projections suggest one more rate hike this year, but rates may not climb much higher in 2027. Historically, these 'non-cycles' have resulted in the smallest drawdowns, with stocks typically recovering relatively quickly within a year after an initial rate hike.