The U.S. economy continues to adjust to the effects of the tightening of monetary policy started by the Federal Reserve in March 2022 and the disruptions to the supply chain begun by the pandemic in March 2020. The net effect of that process has been a slowing pace of aggregate economic activity, which has been strongly felt in the construction industry.
The principal source of uncertainty facing both the policy makers and all economic actors is whether the economy will go into recession in 2024.
Two elements are likely to decide that issue. The first is when and how and why the Federal Open Market Committee (FOMC) calls a halt to the rise in the target Federal Funds Rate. The second is whether any further disruptions to the supply chain occur.
The current rise in the Federal Funds Rate is the result of two decisions by the FOMC. The first, which has largely gone unnoticed, was their desire to move away from the Zero Interest strategy that was first put in place during the recession of 2007-2009. The second, which is the more widely known, was their mission to restore price stability following the outbreak of inflation.
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While it was felt that the exigent circumstances that surfaced as the economy contracted warranted the extreme measure of setting the base interest rate at zero, by late 2015, the FOMC began to raise the target rate in order to bring conditions in the fixed-income market back to more traditional levels.
That effort started in December of 2015 with the Federal Funds Rate at averaging 0.24% and ended in July of 2019 when the Funds Rate averaged 2.40%. At that point the FOMC, reacting to a softening of economic activity, began lowering the Funds target such that it stood at a 1.58% average for February 2020, which is when the pandemic began.
