Fed Rate Hikes Are Just Starting To Bite!
The May 3, 2023, .25% Fed rate hike brings the 15 month total in hikes to 5.00%. Rate hikes increase the cost of money throughout the economy. Businesses invest less and people spend less at those higher rates.
Each Fed rate hike works on the Real Economy with ‘long and variable lags’, in Fed-speak or ‘over time’ as we call it. The problem is there isn’t much definition as to the length of those lags. Our February 16, 2023, post lays out our assumptions of lag timing and shows a map of when hikes will impact the Real Economy and by how much. Our April 11th post gives an update for then-current rate increases. Here is the update for the May Fed rate hike and a reminder of the assumptions.
| Qrtr End | Qrtrly Impact | Cum Impact | Qrtrly % Total | Cum % Total |
| 09.2022 | 0.038% | |||
| 12.2022 | 0.188% | 0.225% | 3.750% | 4.500% |
| 03.2023 | 0.350% | 0.575% | 7.000% | 11.500% |
| 06.2023 | 0.813% | 1.388% | 16.250% | 27.750% |
| 09.2023 | 0.888% | 2.275% | 17.750% | 45.500% |
| 12.2023 | 0.975% | 3.250% | 19.500% | 65.000% |
| 03.2024 | 0.625% | 3.875% | 12.500% | 77.500% |
| 06.2024 | 0.650% | 4.525% | 13.000% | 90.500% |
| 09.2024 | 0.213% | 4.738% | 4.250% | 94.750% |
| 12.2024 | 0.188% | 4.925% | 3.750% | 98.500% |
| 03.2025 | 0.050% | 4.975% | 1.000% | 99.500% |
| 06.2025 | 0.025% | 5.000% | 0.500% | 100.000% |
Here are the assumptions of when we think the ‘long and variable lags’ impact.
| Assumptions Used | ||
| Explanation | Period | Cumulative |
| Percent of Rate Increase that impacts the Real Economy in first 6 months | 15.000% | 15.000% |
| Percent of hike impact in months 7 thru 12 | 50.000% | 65.000% |
| Likewise, the Impact in months 13 thru 18 | 25.000% | 90.000% |
| Finally, we assume the last of the Impact is felt in months 19 thru 24, 2 years after the hike! | 10.000% | 100.000% |
COMMENTS
| 1) | Coming into 2Q23, only .225% of the Fed’s 5.00% in hikes have hit the Real Economy. That’s only 4.50% of the total. | ||
| 2) | In the current quarter, .813% in hikes hit, bringing the cumulative total to 1.388%, or 27.75% of the 5.00% in hikes. | ||
| 3) | The Impact will be strongest in the second half of the year, with .888% in 3Q23 and .975% in 4Q23, for a six month total of 1.863% or 37.3% of the 5.00% in hikes. | ||
| 4) | By the end of 2023, 3.25% of the 5.00% total hikes will have Impacted the Real Economy. That’s 65.00% of the hikes so far. We have to assume it will only get slower as the year progresses. | ||
| 5) | Looking at current data in the economy, we see layoffs starting to pick up significantly, consumers are beginning to be wary of spending, job openings are dropping monthly, hiring is slowing. All this suggests the economy is definitely starting to slow. That is the Fed’s goal. | ||
| 6) | In addition to this rate escalation, remember Quantitative Tightening (QT) is also working to slow the economy as well by cutting the reserves in the banking system which limits banks’ ability to lend. | ||
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