Yesterday’s CPI report was a reminder that, despite how it feels, the inflation crisis might not last forever. This raises the question of how to think about the Federal Reserve, and makes us look back to previous moments in history.

The most relevant precedent could be 1994 and early 1995, when policymakers doubled their target rate from 3 percent to 6 percent.

The chart below recaps this period nearly three decades ago. Not surprisingly, the S&P 500 started falling as the hikes began. But it also turned higher in mid-December, 2-1/2 months before the last increase. (The great 1995-2000 bull run followed that historic pause.)
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Another key fact is that the process lasted almost exactly one year.

Fast forward to the present and some interesting parallels may arise. The current hiking cycle began in March 2022. The most recent dot plot and CME’s FedWatch tool both suggest it will end in March 2023 – also one year in length. (As noted on the initial chart.)

Next, stocks have been advancing for the past month. That’s earlier than the previous moment, when the final rally began just five weeks before the pause. However 1994’s pullback was much more shallow (just 10 percent peak to trough). This year’s bear market, with a 28 percent drop, could mean there is more space for a rebound.

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Next is a weekly chart of the S&P 500. Aside from the extreme crash of March 2020, prices have remained within with a parallel channel that began in 2011. Notice how October’s low occurred at the bottom of this rising trend.

Second, the October low represented almost exactly a 50 percent retracement of the surge between March 2020 and January 2022.

Finally, returning to the daily chart you have the 3910 level. This was resistance and support at various times since the summer, but yesterday’s rally tore straight through it. That could also limit the depth of pullbacks, at least in the near term.

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