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The U.S. Federal Reserve is gathering for a two-day assembly today (Wednesday) and tomorrow. Investors are anxiously waiting to see whether or not officials raise interest rates.
But what most traders don't know is that rate hikes used to be a common practice before 2006.
This chart shows the U.S. interest rate history from 1986 to 2015…
The most recent peak in U.S. interest rate history occurred in 1989. The federal funds rate plateaued near 10% and steadily declined until it rose just five years later.
In 1994, the economy was starting to shake off the early-1990's recession. As growth outlook improved, investors regained their confidence and sold off their "recession-proof" Treasury bonds, which sent bond prices lower. Since bond yields and bond prices have an inverse relationship, the sell-off caused Treasury yields to surge higher.
Taking a cue from the rising yields, which neared 8%, then-Chairman of the Federal Reserve Alan Greenspan started tightening monetary policy. Through 1994, Treasury bonds plummeted as interest rates roared higher than 6%.
The last hike occurred in June 2006. The Fed cut the interest rate in September 2007 and proceeded to cut it nine more times through December 2008 due to the onset of the Great Recession. Since then, it has remained near 0%.
Now many investors are wondering if U.S. interest rate history will repeat a similar course as 1994 this week. After all, the 10-year Treasury yield is up 7% this year.
But according to Money Morning Capital Wave Strategist Shah Gilani, investors shouldn't worry about a major sell-off if the Fed decides to raise rates.
"There shouldn't be too much of a market reaction to an interest rate hike," Gilani explained. "A rate increase has already been talked about for so long that it's mostly baked into prices now."
Gilani says that if an interest rate hike happens, it will be a small one – likely 0.25%.
However, an interest rate hike could send stocks lower in the short-term. Some investors may take profits and bring their cash to the sidelines for a bit, but this isn't a reason to panic. A rise in interest rates will not cause a huge downturn.
Alex McGuire is an associate editor for Money Morning. You can follow him on Twitter at @AlexMcGuire92.
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