The Fed is now following its 1994 playbook — when aggressive rate hikes led to a 'bond market massacre'

The Federal Reserve raised its interest rates.

The last time the Fed raised interest rates, Bill Clinton was president, and the movie "Pulp Fiction" was still showing in movie theaters.

With inflation at a four-decade high, Chairman Powell announced a new target rate range of between 1.50% and 1.75% and refused to rule out a similarly-sized hike next month.

The actions of the Fed in the last few days remind me of 1994.

The Fed's move made the stock and bond markets uncertain.

After the hike was announced, the S&P 500, Nasdaq 100, and Dow Jones Industrial Average all went up. Two-year US Treasurys fell 3.8 basis points to 3.24% and 10-year US Treasurys fell 1.7 basis points to 3.38%.

Itay Goldstein, a finance professor at Wharton, told Insider that inflation could be more persistent. The market expects the Fed to take tougher and harsher measures and this is the reason for the price drop.

The 1994 playbook

In an effort to keep the economy from overheating, Greenspan's Fed raised rates seven times in 13 months.

The Federal funds rate went up from 3.05% to 6.05% between 1994 and1995.

The Fed's rate hikes led to a rally in the stock market. Between the start of 1994 and the end of 1995 the S&P 500 and the DOW Jones Industrial Average increased in value.

Analysts don't think investors should expect a soft landing. According to Worldwide Inflation Data, the US had an annual inflation rate of 2.5% in 1994.

"After the final hike in early 1995, the equity market rallied," saidBarclays. Hard landing concerns are not likely to go away soon with inflation and possibly more tightening to come.

The bond market massacre caused by Greenspan's seven rate hikes could be more traumatic for bondholders.

Bonds are less attractive due to the fact that they only deliver a fixed return and that rate hikes make bonds less attractive. The fixed income market was wiped off by $1 trillion in November of 1994.

Michael Wang told Insider that the Fed's 1994 rate hike was aggressive and dramatic. The bond markets were the worst affected by the rapid increase in hikes.

The 2-year Treasury yield is moving in the opposite direction of prices and is expected to go to 3.151% in 2022. The 10-year yield is up 1.710 percentage points.

According to Wells Fargo's investment advisory arm, a recession will hit soon, and stocks won't get back to their highs until at least 2024. It says investors should be prepared.