As Fed Pushed Up Rates in the Past 12 Months, the S&P 500 Sank

Fed's year-long campaign of raising rates to fight inflation took a toll on the benchmark index before a recent rebound.

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Rising interest rates over the last year have taken a toll on the S&P 500, amid some of the most aggressive rate hikes in three decades.  

The benchmark index is down 7.9% since Federal Reserve Chairman Jerome Powell announced the first of a series of fund rate increases one year ago. The S&P 500 closed Tuesday at 4,002.87, down more than 16.5% from the record high set in December 2021, but still up 14.7% from its most recent low.

A chart of the S&P 500 over the last year


The drop came in part because the Fed raised rates eight times over the last year, moving from near zero in March 2022 to 4.5% in February 2023. It did so for a ninth time on Wednesday, by 25 basis points to a range of 4.75% to 5%, its highest since 2006.

After dropping rates to near zero during the pandemic, the Fed raised rates for the first time in three years, saying the move was needed to stop climbing inflation. While hikes in interest rates don’t always correlate to losses in stock market indexes, analysts often look to the Fed’s actions and projections when setting their own outlooks for market performance.

Some economic indicators move more in synchronization with the Fed’s fund rate changes, like credit card interest rates, which have largely mirrored the rate’s steady rise. But instead of moving in tandem with the Fed’s rate hikes, the S&P 500 sea-sawed its way down, before rebounding from a recent low in September 2022.

Market analysts often use the direction of federal funds rate changes to help set their future outlooks. In January, J.P. Morgan’s 2023 market forecast predicted that the S&P 500 would gain ground by year-end-but only if the Fed puts a stop to its rate hikes.

“Over the past year, the Fed has been forced to tighten aggressively, outpacing every tightening cycle over the last three decades,” J.P. Morgan wrote. “In the first half of 2023, the S&P 500 is expected to re-test the lows of 2022, but a pivot from the Fed could drive an asset recovery later in the year, pushing the S&P 500 to 4,200 by year-end.”

UPDATE, 3/23/23: The third paragraph of this story has been updated to include the Fed's latest rate hike.

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  2. Federal Reserve. “Federal Reserve issues FOMC statement.”

  3. J.P. Morgan. “2023 Market Outlook: Stocks Set to Fall Near-Term as Economic Growth Slows

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