As most know, the Federal Reserve has several goals, with two being keeping inflation at 2% and maximum employment. The two main tools in the tool box are the discount rate and buying or selling of Fed-held securities. When it comes to the current state of inflation, many have wondered why the Feds did not react quicker. I would say because it can be a slippery slope, and of course hindsight is 20/20.
Since March, the FOMC has aggressively pursued raising the discount, which has been a shock to many, but it should be remembered that most recently, the rate has been south of 1%. Over the last several decades, it seems it has been averaging in the 4 to 4.75% range, with some exceptions, of course.
I hope you’ll consider reading this interesting piece by Federal Reserve Bank of Atlanta President Raphael Bostic that explains it well. To summarize, when it comes to altering the state of the economy, changes in monetary policy always come with a lag. The average time to see real change may be up to 24 months. That’s because most companies won’t stop projects that are already in the works, but they are more likely to delay future planning or expansion. Having said this, as we all know, residential real estate is one of the sectors most sensitive to rate change, especially to first time buyers.
Some may say we are somewhat on the downhill side and of course time will tell, as the supply chain will have a lot to do with it as well. Beyond all, my view is that our Reserve does not approach any change without much study, and we may see another increase in rates to achieve their number one goal—taming inflation and reaching balance. It does seem that lags are getting shorter, perhaps because of policy guidance that allows financial markets to react to policy before it’s implemented.
In his remarks, President Bostic says that a recession is not a foregone conclusion, but if it does occur, it could be mild by historical standards. We have a positive attitude going into 2023. I also think too many times, if we listen to the news too much, we might talk ourselves into a recession.