Credit Suisse Economics Research published an investment report on Monday, June 30th, titled “A Brief History of Fed Rate Hikes – Lessons from the Past Twenty Years.” This informative report, written by CS research analysts Dana Saporta and Xiao Cui, examines the history of the four Federal Reserve tightening “cycles” from 1993 to today.

Given the wide agreement that the Fed is once again about to begin the interest rate “tightening cycle”, it should be instructive to review commonalities and differences in how the Fed handled the inaugural rate hikes in the past fo.ur cycles. That said, Saporta and Cui also note, “there are also good reasons to expect the upcoming tightening cycle will be different, mainly due to the prolonged period of near-zero interest rates and the unprecedented expansion of the Fed’s balance sheet.”

Related to this, the analysts also highlight the importance of examining the financial and economic conditions that led to the initial rate hike in each of these four cases.

Fed tightening cycle

Common elements to inaugural rate hikes

The Credit Suisse report points out there are a few common elements leading up to the inaugural rate hike in the four cycles under examination. The first common element is a “general desire to be pre-emptive on inflation.” The second is a “preference to start small, especially after a long hiatus.” The third common element in all four cycles is the clearly “expressed intention of sending a clear message to the public” regarding the purposes of the tightening.

Fed rate hike

Takeaway from Feb. 1994 Fed rate hike announcement

Saporta and Cui highlight the February 1994 Fed rate hike announcement as indicative of the preference to start small. “The FOMC felt that since it had been so long since the last tightening, its February 4,1994 move would get unusually great attention. This is primarily why a consensus formed to hike by only 25bp at that meeting. At that time it had been five years since the previous rate hike. If the Fed hikes rates in late 2015, as we expect, it will have been over nine years since the previous rate hike.”

Takeaway from March 1997 Fed rate hike announcement

The CS analysts suggest the March 1997 initial hike is a good example of the Fed’s tendency towards preemptive tightening. “Very strong consumer and business spending, and a labor market that was generally agreed to be “tight,” facilitated the typically difficult decision to tighten policy pre-emptively, before any clear signs that inflation was accelerating. In today’s environment of disappointing demand figures and debatable estimates of labor market slack, such a pre-emptive move would be possible, but more difficult to make.”

Takeaway from June 1999 Fed rate hike announcement

The June 1999 rate hike very much fits in the same preemptive tightening mold. “The need for an emergency policy stance had passed, and “the full degree of adjustment” was “judged no longer necessary.” Even though inflation was benign, Fed officials rationalized their mid-1999 rate hike as insurance against worsening inflation later. Some would point to obvious parallels with today’s post-crisis environment. But the strong demand that characterized the early 1999s–like that of 1996/1997–eased the potential cost of buying such insurance at that time.”

Takeaway from June 2004 Fed rate hike announcement

Saporta and Cui suggest the commentary surrounding the June 2004 rate hike hints that the Fed won’t hesitate to pull the trigger on an initial rate hike if economic data continues its upward trend. “Some fault the FOMC for waiting too long to initiate this tightening cycle and for promoting a dangerous sense of complacency by being too predictable once the rate hikes had begun. To be fair, a few FOMC members in mid-2004 disliked the “measured pace” language and indicated “that their preference would be to remove any characterization of possible future policy actions from the Committee’s statements.”