AFMC - Believe It Or Not Rate Hikes Are Working: The Fed's Next Moves As The Business Cycle Turns

2024-05-31 09:10:00 ET

Summary

• The Fed's interest rate policy is getting surprisingly tight, leading to a slowdown in the economy.
• The Fed is likely keeping rates higher than expected due to concerns about financial stability and asset bubbles.
• Tightening is starting to have an impact, with hiring and demand for housing falling, and certain market sectors experiencing significant declines.
• As the Fed itself notes, valuations for stocks and real estate are significantly above normal levels indicated by profits, rents, and wages.
• Is the Fed targeting the stock market here? It looks like it.

When you dig deep into the numbers, the Fed's current interest rate policy is surprisingly tight and getting tighter. While inflation has been annoyingly stubborn this year, there's now clear evidence that the Fed's interest rate campaign has started to grind down the economy. This morning, GDP growth for Q1 was revised down to 1.3% annualized due to a slowdown in consumer spending. The pace of hiring continues to slow, and leading economic indicators have resumed their long, slow decline after a pause late last year. If you do some econometric modeling, this isn't all that surprising – short-term interest rates are currently above the prescriptions offered by Taylor Rule modeling , so you'd expect the economy to slow as a result....

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