17 straight hikes and an inverted curve: the Fed's 2004-2006 tightening cycle
This case checks the video's 2004-2006 Fed analogy against the actual hike schedule, the long-rate conundrum, and the inversion timeline. It reviews past records for whether hikes can continue after the curve narrows.
Updated Oct 20, 2026
17 straight hikes: from 1 percent to 5.25 percent
The Fed opened the cycle on 2004-06-30 by lifting 1 percent by 25bp to 1.25 percent, then added 25bp every meeting to reach 5.25 percent on 2006-06-29. The opening statement cited solid expansion and improved labor markets while flagging a measured pace. The closing statement noted moderating growth and a cooling housing market.
The long-rate conundrum: falling while policy tightened
Chair Greenspan called it a conundrum in 2005-02-16 congressional testimony: long rates falling while policy rates rose. San Francisco Fed analysis found long Treasury yields down about 50bp since tightening began in mid 2004. Short rates rose without long rates following.
Hikes continued after inversion
The 10-year minus 2-year spread first inverted in 2005-12 and stayed negative, with the sustained multi-quarter inversion running from 2006-06. Still, the Fed climbed through 4.5 percent on 2006-01-31 and 5 percent on 2006-05-10 to 5.25 percent on 2006-06-29. Inversion was not an instant end-of-hikes signal.
The signal is real, but the clock is separate
A narrowing or inverted curve can be read as a directional signal that tightening is biting into the real economy. But the 2004-2006 record shows hikes can continue on growth and inflation judgments even after inversion. Even with the signal confirmed, the count and the end date are separate questions, and scolding-until-tears can repeat while growth endures.
Limits of applying past records
The 2004-2006 cycle unfolded on the conditions of its time: Chinese growth and the housing-market backdrop. Today's AI capex phase and fiscal and inflation conditions differ, so its count and timing cannot be copied directly. This case is a reference for checking what the signal means, not a confirmation of short-term price direction.
Sources
- FRB Press Release: FOMC statement and Board discount rate action, June 30, 2004Accessed Oct 20, 2026
- FOMC statement, January 31, 2006Accessed Oct 20, 2026
- FOMC statement, May 10, 2006Accessed Oct 20, 2026
- FOMC statement, June 29, 2006Accessed Oct 20, 2026
- The Long-term Interest Rate Conundrum: Not Unraveled Yet?Accessed Oct 20, 2026
- 4 Times There Was an Inverted Yield Curve (And What Happened to Stocks)Accessed Oct 20, 2026
- Fed May Pause Rate HikesAccessed Oct 20, 2026