Economics: Tracing the long and variable lags

Longer and more variable lags?

The Fed’s hiking cycle is now eight months old. But, except for housing, there are few signs of it restraining activity. Are the ‘long and variable lags’ of monetary policy longer and more variable than usual? We don’t think so. The drag will be clearer in 1H 2023.

Four channels of monetary traction

We expect clearer evidence in four areas: first, employment in construction and related industries; second, a further slowdown in consumption; third, a decline in non-residential fixed investment; and fourth, a growing drag from net trade.

A growing drag on growth in 1H 2023

Individually, these four channels look likely to exert a meaningful drag on growth next year. When combined, the drag could be even larger. It looks likely to be most intense in 1H 2023. We retain high conviction in our view that the US will fall into recession.