By: David Scutt, Market Analyst
Six modern Federal Reserve tightening cycles since 1994 qualify as genuine restarts, and only two of them began the way this one does. The 1994 and 1999 cycles are the closest comparisons because the Federal Reserve was already operating near neutral, and in both the U.S. two-year yield kept rising after the first hike while the dollar index weakened. The 1999 case adds a second layer, since the Federal Reserve was tightening after a run of insurance cuts and against the backdrop of a technology investment boom. That combination is why front-end rates and the U.S. dollar parted company, and it is the combination traders are looking at again as artificial intelligence capital spending builds.
David Scutt is Senior Market Analyst for Global Macro at StoneX Media, with more than a decade spent as a foreign exchange spot, forwards and money markets dealer in bank treasury, managing interest rate and liquidity risk. He produces technical and fundamental analysis across foreign exchange, commodities and equity indices, the markets where a Federal Reserve tightening cycle and a capital spending wave land at the same time.
Of the six modern Federal Reserve tightening cycles, the 1994 and 1999 episodes are the two that began without the Federal Reserve lifting rates away from the zero lower bound. Scutt, describing why those two stand apart, notes that "in both instances, the fed was starting with policy settings much closer to neutral, rather than lifting rates away from the zero lower bound", in contrast with 2015 and 2022. The consequence for the U.S. dollar was counterintuitive, because the two-year yield kept rising after the first hike in both cycles and the dollar index fell regardless, sharply so in 1994 and more moderately in 1999. For a trader, that reframes what a starting point near neutral is worth, since the currency has less room to reprice a policy stance the market has already absorbed. Rising front end rates are a weaker dollar signal in cycles that begin from a normal policy setting than in cycles that begin from emergency settings.
The 1999 cycle carried a structural backdrop that the other modern cycles lacked, and it is the reason the comparison is being revisited. The U.S. economy was absorbing a large wave of capital spending on technology at the same time as the Federal Reserve was withdrawing accommodation it had added defensively. Capital flowing into a domestic investment boom does not behave like capital chasing a yield differential, which is one reason front end rates and the dollar index can move apart for extended periods. According to Scutt, "the fed was tightening after a period of delivering insurance cuts while the U.S. was going through a huge wave of technological investment as the internet boom gathered pace", with the parallel to the artificial intelligence capital expenditure build out following directly from that.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: David Scutt, StoneX Media Senior Market Analyst
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The 1999 tightening cycle began with the Federal Reserve close to neutral, following a run of insurance cuts, and with a technology investment wave running through the U.S. economy. Front end yields kept climbing after the first hike, and the dollar fell anyway.
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