How do expectations for this hiking cycle differ from history?

  • The Federal Reserve began a new rate-hiking cycle in September 2026. When the report was published, markets were pricing in roughly three further hikes and approximately 100 basis points of tightening over the full cycle; Goldman Sachs economists expected one further hike.
  • Goldman Sachs studied nine tightening cycles since 1983, excluding the current one. Rates rose by an average of approximately 260 basis points over roughly 13 months. There are few historical examples close to the modest hikes expected in the current cycle: rates were raised only once in each of 1997 and 2015, while cumulative hikes in 1999 totaled 175 basis points.

How do stocks, bonds and the dollar typically perform after the first hike?

  • In both modest and larger tightening cycles, the median path of the S&P 500 index has been to bottom within two months of the first hike and recover its losses within four months. Individual cycles differ markedly: returns were negative six months after the first hike in 1994 and 2022, and were also negative after twelve months in 2022.
  • Short- and long-term US Treasury yields typically rise before the first hike. In modest cycles, median yields tend to peak shortly after the first hike; in larger cycles, they continue rising for a time. The spread between 10-year and 2-year yields typically continues to narrow, with a more pronounced and longer-lasting narrowing in larger cycles.
  • The real trade-weighted dollar typically strengthens before the first hike, then performs differently across cycles.

Why did stocks perform differently in two cycles with just one hike?

  • In both 1997 and 2015, US Treasury yields peaked around the first and only hike of the cycle and subsequently fell. But in 1997, stocks bottomed quickly and rose strongly; in 2015, although they bottomed within two months, they took longer to recover their pre-hike level and traded mostly within a range overall.
  • The difference lies in why tightening was interrupted: in 1997, inflation was milder than expected and growth remained strong, so risk assets benefited from both a shift toward easier policy and optimism about growth; in 2015, global growth concerns and financial market volatility accompanied the policy shift and weighed on stocks for longer.

Which historical period does the current cycle resemble? What is Goldman Sachs's assessment?

  • At the start of the 2026 hiking cycle, the labor market was strong and the policy rate was well above zero, making it more like 1997 and 1999; growth was more like 2015, while stock valuations were close to those of 1999. Core PCE inflation at the starting point was 3.0% year over year, above its level at the start of the three modest cycles.
  • Goldman Sachs's baseline assumes only a few rate hikes, growth remaining near its potential level and inflation gradually easing; on that basis, it expects stocks to rise modestly.
  • If inflation eases more markedly and rate hikes end early, that would be the most favorable scenario for risk assets; if financial stress spreads and triggers growth concerns, the initial period after tightening is interrupted would be less favorable. Another possibility is that persistently strong growth and an investment boom drive a longer tightening cycle: the longer it lasts, the greater the risk of larger subsequent cuts to growth expectations.
  • 1999 offers a reference for the latter scenario: yields continued to rise and the S&P 500 index broadly traded within a range during the sustained hiking period; the technology bubble subsequently burst and contributed to the 2001 recession.