Earlier this year, we wrote about the 2-year lag in monetary policy and why this mattered so much for 2024. As we’re halfway through the year, have we seen the lagged effects of monetary policy in economic data? 

The Federal Reserve began hiking rates in March 2022. Federal Reserve studies show that monetary policy can take 1.5 – 2 years to take effect. This means we would have begun to see the effects of these interest rate hikes over the last 6 months. 

 Here are some indications that the lagged effects of 2022’s interest rate hikes are taking hold: 

• Retailers like Kohl’s have blamed high interest rates for their earnings misses. At the same time, discount stores like Dollar General have seen their sales jump.
• Wal-Mart, Target, and Walgreens have slashed prices on thousands of items. This comes as an attempt to boost sales. Their internal data shows their clientele has become budget-constrained
• Home foreclosures are rising in Texas and Florida, with Houston leading the nation with a 37% jump.
• Growth numbers for software companies like Salesforce are sinking into the single-digits 
• Credit card delinquencies are growing at the highest levels in over a decade.

Finally, the unemployment rate has begun to creep up. We’re close to the level of increase we see at the onset of economic recession as measured by the Sahm Rule. 

We’ll see how this plays out throughout 2024. The Fed Funds rate rose 4 percentage points in 2022. Most of those rate hikes occurred in the second half. Given a two-year lag, we may not see the full effect of rate hikes until later this year. 

Nevertheless, we’re already beginning to see the Fed’s tightening take hold. Any further slowdown in the economic data is likely to change the environment for stocks and bonds.