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.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.