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Chicago Fed Letter

Past and Future Effects of the Recent Monetary Policy Tightening

Stefania D’Amico and Thomas B. King

We estimate how much of the impact from the Fed’s current tightening cycle is yet to be felt in the U.S. economy in both absolute and relative terms. To do this, we use the model from D’Amico and King (2023), which explicitly incorporates economic expectations and allows for forward guidance. That model implies larger effects of monetary policy and faster policy transmission than other empirical models. We estimate that although the majority of the effects on output and inflation have already occurred, the policy tightening that has already been implemented will exert further restraint in the quarters ahead, amounting to downward pressure of about 3 percentage points on the level of real gross domestic product (GDP) and 2.5 percentage points on the Consumer Price Index (CPI) level. Tightening effects on the labor market manifest more slowly, so more than half the policy impact on total hours worked is yet to come. According to the model’s forecast, the policy tightening that’s already been done is sufficient to bring inflation back near the Fed’s target by the middle of 2024 while avoiding a recession.

The Rise of Intangible Investment and the Transmission of Monetary Policy

Joel M. David and François Gourio

Monetary policy acts on the economy primarily through its effects on investment spending. But the nature of investment has evolved over time: “Intangible assets”—such as intellectual property or software—play an increasingly important role in the modern economy. In this Chicago Fed Letter, we study the implications of this change for the transmission of monetary policy. We show that investment in intangible assets is less sensitive to interest rates than investment in tangible assets. This suggests that the secular shift toward intangibles has reduced the responsiveness of aggregate economic activity to changes in the short-term interest rate set by the Federal Reserve—by about one-quarter according to our simple calculations.

Higher Home Prices and Higher Rates Mean Bigger Affordability Hurdles for the U.S. Consumer

Max Gillet and Cindy Hull

In the U.S., homeownership is often described as part of the “American dream,” a way for consumers to accumulate wealth and gain other economic benefits. Almost two out of three U.S. households own the home they live in, a relatively stable amount over the last decade. Buying a home is usually the largest investment that a consumer will make, and the purchase price usually far exceeds what most can afford out of their current savings. In 2022, roughly 70% of home purchases were made with the help of mortgage financing.

UK Pension Market Stress in 2022—Why It Happened and Implications for the U.S.

Ketan B. Patel and Santiago I. Sordo Palacios

A steep increase in British sovereign yields and swap rates and an equally steep drop in the value of the British pound (GBP) in September 2022 put substantial liquidity pressures on United Kingdom pension funds. This repricing in risk assets was triggered by the UK chancellor’s mini-budget announcement on September 23, 2022, which led to reactions from market participants. The structure and investment strategies of pension funds made them particularly ill-prepared to deal with market turmoil.

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