hiking cycle

A sustained period during which a central bank systematically raises interest rates to cool economic growth and curb inflation.

A hiking cycle is a sustained macroeconomic phase during which a central bank systematically raises its benchmark interest rate over consecutive policy meetings. This process is designed to increase the cost of borrowing for consumers and businesses, which in turn cools consumer demand, slows down economic growth, and helps curb high inflation. During this phase, commercial banks pass along the central bank's rate increases to their customers, leading to higher interest rates on mortgages, credit cards, auto loans, and business lines of credit. Conversely, yields on savings accounts and certificates of deposit also rise. Central banks monitor economic indicators like employment data and consumer price indexes to decide how fast and how high to raise rates before pausing or reversing the cycle. For investors, a hiking cycle is a critical period that often triggers asset reallocation. Higher interest rates increase the discount rate used in discounted cash flow models, which compresses valuation multiples—particularly for high-growth stocks with cash flows expected far in the future. Additionally, rising rates push bond yields up and bond prices down, making fixed-income assets more competitive relative to equities and potentially leading to a broader risk-off environment.

The Federal Reserve enters a hiking cycle to combat inflation, raising the federal funds rate from 0.25% to 4.75% over 12 months through a series of consecutive 50 and 75 basis point increases. As a result, a company's cost of issuing new debt rises from 3.5% to 7.0%, doubling its interest expense on new loans.