Resilient Canary: A Year into Rate Hikes, the Economy Sings On
The Canary is Alive and Chirping A Year Into Fed’s Rate Hiking Cycle
Many pundits have been predicting the demise of the U.S. economy due to the Federal Reserve’s historic drive to arrest inflation with rapid interest rate hikes. However, a year into the tightening cycle, the economy continues to operate beyond capacity. In addition, representing represents the U.S. construction industry is still breathing, despite falling housing starts and a banking crisis that has rattled markets in the last two weeks.
The Mixed Inflation Scorecard
The Fed’s primary aim throughout its aggressive tightening cycle has been to reduce inflation from the 40-year-high reached last summer to the 2% annual rate, which it considers consistent with its generic goal of “price stability.” While inflation has slowed, recent progress has been less than hoped. As a result, Fed Chair Jerome Powell said we might need higher interest rates to slow an economy that doesn’t want to buckle.
Dogs That Didn’t Bark (Yet)
The status of the construction industry shows the Fed’s pandemic-era dilemma. Housing is an important channel through which monetary policy works on the economy. As interest rates rise, buying slows, and existing homeowners shy away from financing major improvements, which affects construction employment. However, it’s not happening the same way this time. Although housing starts are falling, the amount of completion still happening means many contractors can move on to other non-housing projects.
The job market overall has shown no signs of slowing, which is necessary for inflation to fall.
- The Fed has increased interest rates by over half a percentage point at each of its eight meetings since March of 2022.
- The Fed regards a 2% annual rate as consistent with its generic goal of “price stability.”
- The construction industry is affected by rising interest rates as buying slows, leading to fewer housing starts and a decline in construction employment.
- Banks have had a crisis in the last two weeks due to higher interest rates.
Although the Fed increased interest rates a year ago to reduce inflation, the economy has continued operating beyond capacity. Higher interest rates have slowed down the housing market, but several contractors have moved on to other non-housing projects, and the job market has not shown any significant signs of slowing down.
Despite the negative predictions, the canary represented by the U.S. construction industry is still chirping, and the economy is operating beyond capacity. While the Fed’s tightening cycle has slowed down the housing market, it has not significantly impacted the job market, and contractors have moved on to other non-housing projects.