Fed’s 4.75% Of Rate Hikes-1 Year Anniversary
After one year and 4.75% in rate hikes, it’s time to assess the impact on the real economy. With Monetary Policy Lag, the real economy feels each hike over the course of months, and each month includes the cumulative effect of portions of the hikes. In our February 16, 2023, post, VIEW FROM THE BLEACHERS: FED RATE INCREASES- IMPACT TIMING MAP, we made some assumptions about the length of these lags.
| Chart #3 | ||||||||||
| 12.2022 | 03.2023 | 06.2023 | 09.2023 | 12.2023 | 03.2024 | 06.2024 | 09.2024 | 12.2024 | 03.2025 | |
| Incremental Impact, Quarterly | 0.23% | 0.35% | 0.81% | 0.89% | 0.94% | 0.63% | 0.53% | 0.21% | 0.13% | 0.05% |
| Cumulative Quarterly Impact | 0.58% | 1.39% | 2.28% | 3.21% | 3.84% | 4.36% | 4.58% | 4.70% | 4.75% | |
| Each Quarter | 4.74% | 7.37% | 17.11% | 18.68% | 19.74% | 13.16% | 11.05% | 4.47% | 2.63% | 1.05% |
| Cumulative | 12.11% | 29.21% | 47.89% | 67.63% | 80.79% | 91.84% | 96.32% | 98.95% | 100.00% |
It’s time to revisit our analysis and see where we are on the Impact Map. Chart #3 breaks down, by quarter, when the past hikes will impact the economy. The top two lines represent progress as measured by percentage points, or amount of the hikes. Right now it stands at 4.75% total. The lower two rows show the progress as a percentage of the whole, or 100%.
As of March 31, 2023, and the end of 1Q2023, we see .35% points of past hikes impacted us, for a cumulative impact of .58% points. That represents only 12.11% of the entire 4.75% in hikes. There’s a lot of economic slowing coming!
Looking ahead, 2.64% points of the 4.75% will negatively affect the economy over the balance of 2023. Or, at yearend 67.63% of the Fed’s monetary tightening thus far will reach the real economy with force. For perspective, let’s look at what the 12.11%, or .58% points, of the total hikes have accomplished.
Interest rates are rising for the first time in many years. That makes everything we do with borrowed money (mortgage, auto loan, credit cards, business loans, etc.) cost more just for the money, leave alone the rising prices of goods and services we intend to use that money for. That rapid rise from roughly 0%-.25% rates up 4.75% impacted outstanding bond prices, drastically dropping the value of them. That damage became clear with the collapse of the Silicon Valley Bank. That’s another post though.
Many economic pressures are starting to come to bear on the real economy. In the short run they are not looking like fun. One huge headwind for the Fed and monetary policy is Congress and fiscal policy. Remember that inflation is too much money chasing too few goods. The amount of deficit spending over the last two years put more money into the economy than the economy could absorb. That kind of fiscal deficit spending is meant to stimulate a sagging economy. Problem is, it just as much stimulates an economy that is already running at capacity! And the pop-off valve that reliefs that pressure is, unfortunately, inflation.
Over the 2nd quarter of 2023, we can expect reality, and 1Q2023 earnings, to set in to the labor market. Hiring will slow, lay offs will definitely rise and the Participation Rate will inch higher. This will add Halon to the inflation fire and the economy. More cautious consumers spend less, curbing demand in the economy. Less demand in the supply chain will then cure inflation to some extent. We will keep a sharp eye on the Fed’s attempt to remove ‘money’ from the economy (QT-Quantitative Easing). This is the money they created during the last 2 to 3 years to support Congress and the Fiscal policies and their massive deficit spending.
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