What Happens to Trade-Weighted Dollar (Broad) When the Fed Raises Rates?
What happens to markets when the Federal Reserve raises interest rates? Rate hike cycle impacts on stocks, bonds, housing, and crypto explained.
How Trade-Weighted Dollar (Broad) Responds
Scenario Background
When the Federal Reserve raises the federal funds rate, it increases the cost of borrowing throughout the economy. Higher rates make mortgages more expensive, increase corporate debt service costs, raise the bar for business investment returns, and make holding cash and short-term bonds more attractive relative to risk assets. The Fed typically raises rates to combat inflation or to normalize policy after an extended period of accommodation.
Read full scenario analysis →Historical Context
Major hiking cycles include 1994-1995 (300 bps, no recession), 1999-2000 (175 bps, dotcom bust), 2004-2006 (425 bps, housing crisis), and 2022-2023 (525 bps, the most aggressive since the 1980s). The 1994 cycle is the rare "soft landing" example where aggressive hikes did not cause a recession. The 2004-2006 cycle is the cautionary tale, the Fed raised rates 17 consecutive times, eventually triggering the subprime mortgage crisis and the worst financial crisis since the Great Depression. The 202...
What to Watch For
- •Fed language shifting from "further tightening" to "data dependent",signals a pause
- •Core inflation declining for 3+ consecutive months
- •Housing starts and existing home sales declining sharply
- •High yield credit spreads widening above 500 bps
- •Initial jobless claims rising above their 12-month moving average
Other Assets When the Fed Raises Rates
Other Scenarios Affecting Trade-Weighted Dollar (Broad)
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