Monetary policy usually acts on the economy with 'long and variable' lags. As the Federal Reserve raises interest rates to cool the economy and slow inflation, it is contending with the imprecise and inconsistent effect of monetary policy on the economy.

Part A) Complete Each Question

Question 1: The Fed tends to move in incrementally when adjusting inflation. What has the Fed decided when adjusting interest rates in the current state of the economy?

Question 2: In defense of this year's rate hikes by the Fed, what did Chairman Jerome Powell state in defense of the pace of the rate hikes?

Question 3: How are capital markets expected to perform to Fed rate increases? Why?

Question 4: How the the Fed rate hikes affected the housing market? When did the housing market start pricing in the Fed rate hikes? How do you expect the real estate market to perform going forward? Why?

Question 5: How has Fed tightening affected the Labor market? What do you expect going forward relative to the labor market? Why?

16:11 .1 5G CJ Fed's Aggressive Rat... THE WALL STREET JOURNAL. Charod Dodd Home World U.S. Politics Economy Business Tech Markets Opinion Books & Arts Real Estate Life & Work Style Sports Search Q THE WALL STREET JOURNAL. Charod Dodd EXPLORE WSJ RECIPES English Edition " Print Edition | | Video | Podcasts | Latest Headlines | More Home World U.S. Politics Economy Business Tech Markets Opinion Books & Arts Real Estate Life & Work Style Sports Search Fed tightening cycles 2004-06 2022 3.75 pct. pts. Fed's Aggressive Rate Hikes Are a Game in nine months 1994-95 Changer Monetary policy usually acts on the economy with 'long and variable' lags 2016-18 1999-2000 SHARE By Aziz Sunderji Nov. 21, 2022 7:00 am ET SAVE PRINT A TEXT Listen to article (4 minutes) Queue As the Federal Reserve raises interest rates to cool the economy and slow inflation, it is contending with the imprecise and inconsistent effect of monetary policy on the economy. The Nobel Prize-winning economist Milton Friedman famously argued that "monetary actions affect economic conditions only after a lag that is both long and variable." Since it can take years before the full effects of tightening become apparent, the Fed tends to move CIRCLE.COM incrementally, adjusting policy gradually while scrutinizing economic data for signs of its effects. Federal-funds rate target during hiking cycles 20% On average, since 1975, when the Fed tightens policy it raises interest rates by almost five percentage points over nearly 20 months. 0 9027 Circle Internet Financial Limited In the current cycle the Fed has hiked by 3.75 percentage points over nine months. 1980 1990 2000 2010 2020 Note: From December 2008, midpoint of target range. December 2015 hike excluded from 2016-18 cycle Source: Federal Reserve In the current state of the economy, the Fed has decided it doesn't have the luxury to act slowly. Inflation.has risen rapidly to a level not seen in decades. The central bank has chosen to slam on the brakes. This less-incremental approach raises the risk that Fed officials overdo rate increases, plunging the economy into a deeper recession than is needed to tame inflation. The Fed this year has been raising rates at the fastest pace in four decades. Chairman Jerome Powell has said this pace is appropriate "given the persistence and strength in inflation and the low level from which we started." Pace of Fed hiking cycles 20% o Steepness indicates to pace of Fed hikes Facing soaring inflation, the Fed hiked at a rapid pace of over one percentage point per month in 1980-81. The Fed has been raising rates at the fastest pace since the 1980-81 cycle. 1980 1990 2000 2010 2020 O= 20 OF Dashboard Calendar To Do Notifications Inbox16:11 .1 5G CJ Fed's Aggressive Rat... 1980 1990 2000 2010 2020 Note: From December 2008, midpoint of target range Source: Federal Reserve Stocks Capital markets tend to be sensitive to Fed rate NEWSLETTER SIGN-UP increases. Stocks and bonds typically anticipate Real Time Economics the Fed's moves, especially when Fed officials The latest economic news, analysis and data telegraph those moves in advance, as they have curated weekdays by WSJ's Jeffrey Sparshott. this year. Higher rates make bonds and bank deposits more attractive. They also weaken the Preview Subscribed economy and corporate profits. That induces MOST POPULAR NEWS investors to move away from stocks Investor Home Purchases Drop 30% Bonds now offer the highest yields since 2007. The S&P 500 peaked in January of this year, as Rising Rates, High Prices Cool Housing more than two months before the Fed began hiking in March. Lower stock prices reduce Market consumers' wealth and their spending. 2. Walt Disney CFO, Others Brought Fed hikes and S&P 500 bear markets Concerns to Board Over Bob Chapek Fed hiking cycles S&P 500 bear markets 3. FTX Lawyer Says 20% "Substantial Amount' of Crypto Firm's - Stocks peaked eight months after the Assets Stolen or January 1987 hike. Markets crashed Missing on 'Black Monday' shortly thereafter. How Elon Musk's Twitter Faces This year, stock markets began Mountain of Debt, declining in January, two months Falling Revenue and before the Fed hiked in March. Surging Costs 5. Beyond Meat's Very Real Problems: Slumping Sausages, Mounting Losses 1980 1990 2000 2010 2020 Sources: Federal Reserve; Dow Jones Market Data MOST POPULAR OPINION Housing market Opinion: The Progressive Paradox on Marijuana Higher Fed interest rates damp the housing market by raising mortgage rates and making homes less affordable. In the past quarter-century, moves in mortgage rates have occurred in anticipation of Fed rate increases, as shown in the chart below. In Mr. Powell's words, 2. Opinion: Brian Kemp Is GOP's Best Bet for 'Markets are thinking, what's the central bank going to do?" 2024 The Fed didn't hike until March 2022, but for the housing market, tightening started in 3. Opinion: Biden's Railroad Deal Falls January 2021, when mortgage rates started rising. They have since risen by more than in Apart any cycle since 1981. 4. Opinion: A Diverse Thanksgiving Without Relationship between Fed target rate and 30-year mortgage rate lows and highs Affirmative Action Fed hiking cycles Mortgage rates 5. Opinion: The Inflation Reduction Act Comes 20% for Medicare Rates started rising 15 months before the first hike, and have 15 risen by more than RECOMMENDED VIDEOS any cycle since 1981. FTX's Bankruptcy: 10 Three Things to Know Watch: NASA's Orion Spacecraft Flies Above the Far Side of the Moon 1980 1990 2000 2010 2020 3. Colorado Springs Suspect Faces Murder, Note: From December 2008, midpoint of target range Hate-Crime Charges, Sources: Federal Reserve; Freddie Mac via Federal Reserve Bank of St. Louis Community Mourns Watch: Donald Trump As higher rates make homes less affordable, housing activity slows. Historically, housing Announces 2024 Bid starts begin to decline within two years of a Fed hike. New home construction fell by 24% for Presidency from the Fed increase in March to July. 5. Watch: Garland Declines in home construction that follow Fed rate increases can take years before they Appoints Special Counsel for Trump bottom out. Investigations Change in housing starts, from start of hiking cycle Housing starts typically decline within Housing starts didn't stabilize wo years of the first hike in the cycle. until almost five years after the 0% Fed started hiking rates in 2004. -20 2022 -40 cycle 1983-84 cycle New homes were built at a rate of 1980-81 -60 1.4 million a year in cycle July, a 24% decrease 1976-80 1987-89 cycle cycle from the peak in April. -80 2004-06 cycle YEARS FROM FIRST HIKE Note: Chart shows select hiking cycles. Declines are from first hike to lowest level of housing starts. Current cycle shown to recent low in July 2022. Based on seasonal Source: U.S. Census Bureau and U.S. Department of Housing and Urban Development Labor market The Fed likely won't be satisfied that its tightening has been sufficient until it can be 20 Dashboard Calendar To Do Notifications Inbox16:11 .1 5G CJ K Fed's Aggressive Rat... Note: Chart shows select hiking cycles. Declines are from first hike to lowest level of housing starts. Current cycle shown to recent low in July 2022. Based on seasonally adjusted annual rates. Source: U.S. Census Bureau and U.S. Department of Housing and Urban Development Labor market The Fed likely won't be satisfied that its tightening has been sufficient until it can be confident that it can avoid wage-price spirals, when rising prices and wages reinforce each other. Ideally, this would happen without unemployment rising-a so-called soft landing, which occurred in 1983-84 and 1994-95. But when inflation starts out too high, as it is now, unemployment usually rises notably, and a recession occurs. Advertisement . Scroll to Continue A brand new flavor of ipad Learn more Historically, this doesn't happen until several years after the first increase. This time could be different, since the Fed is hiking more aggressively. Periods of Fed hiking and rising unemployment Fed hiking cycles Periods of rising unemployment 20% Typically, unemployment doesn't Unemployment soared begin to rise until more than during the pandemic. two years after the first hike. 1980 1990 2000 2010 2020 Note: The unemployment rate rose to 3.7% in October, up from the pandemic low of 3.5% a month earlier. Sources: Federal Reserve; Labor Department Inflation Typically, inflation has only fallen after unemployment has risen, and long after the first rate increase, but the exact timing has varied. If the fall in core inflation (which excludes the volatile food and energy components) between September and October continues, and September proves to be the peak, the time between the first Fed increase and the high point of inflation will be one of the shortest of any Fed hiking cycle. Often, the break in inflation has been accompanied by a recession. But recent economic readings have been strong-the economy grew in the third quarter, job openings remain high and jobless claims remain low. Whether the economy escapes a recession now hinges to a large extent on whether that fall in inflation continues apace. Proximity of peak inflation and recessions to initial rate hikes, from year hiking cycle began 1976 1980 RECESSION Inflation peaked more A severe recession after than three years after 1983 Fed achieved soft the Fed hiked. renewed inflation 1987 landings in 1983 prompted further hikes 1994 and 1994 cycles Inflation rose for more than 1999 four years after the 1987 hike, but remained under 6%. 2004 2016 2022 + If inflation peaked in September YEARS FROM FIRST HIKE Note: Inflation refers to core CPI. Sources: Federal Reserve; Labor Department Why Inflation Has Lasted for So Long In 2021, officials thought that high inflation would be temporary. But a year later, it was still near a four-decade high. WSJ's O= 20 O= Dashboard Calendar To Do Notifications Inbox