BIT Research: The Fed Begins a Rate-Hike Cycle—Will Bitcoin and US Stocks Repeat 2022?
- Core view: The Fed has begun this rate-hike cycle, but the gap between market expectations and the policy path is relatively small, with inflation pressure concentrated on the energy supply side. This round is closer to an orderly adjustment than the sharp tightening of 2022, and oil prices and the midterm elections are key future variables.
- Key elements:
- The market has already priced in about 3 rate hikes, far below the 8 priced in before the 2022 hikes, and the expectation gap has narrowed significantly.
- Core CPI is still falling year-over-year, inflation has not spread broadly, and pressure is mainly concentrated on the supply side, such as oil prices.
- Historical data show that after the first rate hike, the S&P 500's average maximum drawdown over three months was about 5.4%, and it gradually recovered from the fourth month onward.
- Median returns six months after the first rate hike: gold +11.5%, Bitcoin +7.9%, and the US dollar weakened.
- If oil prices peak and decline and core CPI improves, the Fed will gain more room to slow the pace of rate hikes.
- The outcome of the midterm elections and the trend in oil prices are the two key variables to watch over the next six months.
The Federal Reserve has officially begun this round of interest rate hikes, and the market's focus has shifted from "whether rates will rise" to "how much more they will rise." The latest rate projections show that most officials expect further rate hikes within the year, and the market has already priced in about three more hikes. Meanwhile, oil prices are once again approaching $100 per barrel, with rising energy and transportation costs becoming an important factor driving recent inflation.
However, compared with 2022, the backdrop for this tightening cycle is markedly different. At that time, the market had already priced in eight rate hikes even before the Fed began raising rates; this time, the market had priced in about 3.8 hikes before the first increase. More importantly, current inflationary pressure is mainly concentrated in supply-side factors such as oil prices. Core CPI, which excludes energy, is still declining year-over-year, with no clear signs of broad-based spillover.
The First Three Months After a Rate Hike May See Pressure: S&P 500 Average Maximum Drawdown of About 5.4%
Looking back at previous Fed rate hike cycles, U.S. stocks typically remain relatively resilient in the first week after the initial hike, but then tend to decline. On average, the S&P 500 falls about 2.5% after one month, about 5% after two months, and about 5.4% after three months; it then gradually recovers starting from the fourth month, turning slightly positive by the sixth month. In the previous five rate hike cycles, the S&P 500 was higher than its starting point one year after the first hike in four of those instances.
2022 was a notable exception. At that time, the market priced in aggressive tightening in advance, and the S&P 500 fell 8.5% over the following six months and was still down 7.1% after 12 months. By contrast, the current gap between market expectations for future rate hikes and the Fed's policy path is smaller, and with inflation pressure now more concentrated in supply-side factors such as oil prices, this round looks more like a relatively orderly adjustment aimed at oil prices and bond market pricing, rather than the sharp tightening seen in 2022.
Gold Up 11.5% and Bitcoin Up 7.9% Over Six Months: Oil Prices May Be the Key Variable for the Next Phase
Historical data shows that six months after the first rate hike, the median return for U.S. stocks is +1.7%, essentially recovering previous losses; gold rises 11.5%, Bitcoin gains 7.9%, bond yields rise 44 basis points, and the dollar weakens. This means the market may not remain under sustained pressure from the Fed's hawkish stance. What truly matters is the path of future rate hikes and whether inflationary pressure can be alleviated.
One of the biggest variables remains oil prices. If energy prices continue to rise and spread to other inflation components, the Fed may need to maintain stronger tightening; but if oil prices peak and decline while core CPI continues to improve, the Fed will gain more room to slow the pace of rate hikes. At the same time, the midterm elections could also affect market trends ahead. Prediction markets currently assign an implied probability of about 61% that Democrats will control both the Senate and the House. If oil prices begin to fall after the election, that could also remove an important source of market volatility.
Overall, this rate hike cycle differs markedly from 2022: the gap between market expectations for future rate hikes and the Fed's policy path is smaller, and recent inflationary pressure is more concentrated on the energy side. Historical performance shows that the first month after the initial rate hike is an important observation window. If risk assets can remain relatively stable, drawdowns in the second and third months are usually relatively limited. The market often begins to recover from the fourth month and turns positive by the sixth month.
Looking ahead, oil price trends and midterm election results will be two important variables to watch over the next six months. If oil prices decline, the Fed will gain more room to slow the pace of rate hikes; historically, a slower rate hike path is generally more favorable for stocks, gold, and Bitcoin, while putting pressure on the dollar.
Some of the views above are from BIT on Target. Contact us to obtain the full BIT on Target report.
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