Fed Policy Working as Intended

Apollo Chief Economist

Fed hikes are starting to cool down the economy via three transmission channels:

1) The interest rate-sensitive components of GDP are slowing down (housing, autos, and capex spending), see chart below.

2) The tech sector is in turmoil because of higher risk-free rates, and layoff announcements are rising.

3) HY primary markets are essentially closed, and this is having a negative impact on issuing firms in both the goods and service sectors.

The bottom line is that monetary policy is working as intended. The Fed started raising rates in March 2022, and these three transmission channels confirm the conventional wisdom that it takes 12 to 18 months before Fed hikes have their biggest effects on the economy.

From an inflation perspective, higher rates are cooling housing inflation and car price inflation, which will push down headline inflation over the coming quarters. As a result, the Fed will soon have achieved their goal and the FOMC will be done with raising rates.

Fastest housing slowdown on record
Source: NAR, Haver Analytics, Apollo Chief Economist

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