Our index shows that the most interest-rate-sensitive indicators have reacted to the Fed’s changes in policy rate and started to turn red and yellow (top right section of the dashboard shown below indicating weak and slowing activity, respectively). Notably, they include indicators on home prices, financial conditions, and the purchase of big-ticket items. What we haven’t seen yet is a deterioration in indicators that respond to more restrictive policy later in a business cycle, such as consumption and the labor market. They continue to indicate strong activity.
“With the Fed expected to continue raising rates and the hikes it has already made working their way through the economy, we expect to see more red and yellow among these indicators in the months to come,” said Vytas Maciulis, a Vanguard U.S. economist who works closely with the model. (See the bottom right section of the dashboard.)
For context, the left side of the chart reflects activity leading up to and during the global financial crisis. The Fed began raising rates in the second half of 2004 and we started to see significantly more red and yellow at the top of the VLEI dashboard two years later. We see a similar pattern developing in recent data.