The charts below show how consumer spending on services and goods respond during Fed hiking cycles.
There are two conclusions:
1) The first chart shows that spending on consumer services is not very responsive to Fed hikes, and it can take up to 18 months after the first Fed hike before consumer spending on services starts slowing down.
2) The trajectory of consumer spending on goods during this Fed cycle has been very muted. This was likely driven by the strong growth in consumer spending on goods during the pandemic.
The bottom line is that looking at previous Fed hiking cycles, it always takes a long time before Fed hikes begin to slow down consumer spending on services.
With services making up 80% of spending, this argues for the Fed having to raise rates more than the market is currently pricing. And with more rate increases comes a higher risk of a harder landing.
Source: BEA, FRB, Apollo Chief EconomistSource: BEA, FRB, Apollo Chief Economist
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