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Higher rates have begun to affect both housing and auto sales, a development that may give the Fed reason for pause in 2019.

 Home Sales

The Federal Reserve has been steadily raising interest rates throughout 2018, and is projecting more rate hikes in the coming year. However, recent weakening in interest-rate sensitive areas of the economy may convince the Fed to reassess the pace of future hikes.

As shown in the chart above, home sales volume is inversely related to interest rates. Given the uptick in rates over the past few years, home sales in the U.S. have begun to slow – a clear sign of weakening in the housing market. Residential construction has become a much smaller part of the U.S. economy since the housing bubble burst, so the direct impact on GDP is limited. The impact on consumer sentiment could be more meaningful, however, dimming their outlook for the economy more broadly.

Also sensitive to rising rates, vehicle sales have softened in recent quarters after reaching a high water mark in September 2017. While these pockets of weakness suggest that home and vehicle sales may have cyclically peaked, they are among a handful of factors that may prompt the Fed to consider slowing the pace of rate hikes in 2019. One more increase in December is a foregone conclusion, but such developments have the potential to cause the Fed to take a step back and reconsider their current path, slowing the pace of rate hikes, or perhaps even pausing to reassess. Given financial conditions, the slowdown under way in the economy, and the magnitude of rate hikes thus far, we believe that policymakers are closer to the end of the tightening cycle than many may expect.

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