MNI: Surprise Fed Hikes Drag Down GDP, Jobs With Lag -Paper
MNI (NEW YORK) - A surprise one-percentage point hike in the federal funds rate leads to a peak decline of GDP of 0.4% about six quarters out and peak fall in payroll employment of 0.3% about eight quarters out, according to new estimates of the transmission of monetary policy to be presented to Federal Reserve Chair Jerome Powell and his colleagues Friday.
Residential investment and business fixed investment are the largest contributors to the 0.4% GDP decline and construction and durable goods manufacturing lead employment declines, according to co-authors Seth Carpenter of Morgan Stanley, Michael Feroli of J.P. Morgan, David Mericle of Goldman Sachs, Linda Tesar of University of Michigan and NBER and Kenneth West of University of Wisconsin and NBER.
These declines also tend to be frontloaded in the first couple of quarters, they found.
"Rising interest rates are likely to dampen consumption growth, particularly for durables, slow investment and reduce exports. Interest‐sensitive sectors, such as housing and construction, will be most affected by tightening," according to the paper, to be presented at a conference hosted by Booth.
"In many ways, our estimates reinforce existing literature and conform to prior expectations," the authors said, adding however that their analysis did not examine why the post-Covid economy has been so robust in the face of rising interest rates.
Future research could examine whether the ability of households and firms to lock in low interest rates materially changed the impact of monetary policy shocks, they said.