The Real Pain From Rate Hikes May Still Be on the Way

Episode Summary

Executive Summary: The episode features a wide-ranging discussion with economist Julia Coronado on why the effects of Fed rate hikes are still unfolding. She argues that long-and-variable lags, especially through credit and refinancing channels, mean tighter policy has not fully hit the real economy yet. The conversation centers on commercial real estate stress, household balance-sheet health, inflation’s sectoral drivers, and how fiscal spending and energy investment may be disinflationary rather than inflationary.

Main Topics: Monetary policy lags and the credit channel (Priority: 5/5): Coronado argues that the Fed’s tightening is not fully priced in the real economy because credit reprices slowly, especially for fixed-rate and long-duration financing. She distinguishes this from capital markets, which react quickly to Fed guidance. Commercial real estate stress in the Sunbelt (Priority: 5/5): Austin and other Sunbelt boom towns are facing high vacancies, heavy subleasing, and a large construction pipeline. Coronado says this may lead to reduced profits, layoffs, and tighter credit rather than an immediate systemic crisis. Why inflation has cooled without a big unemployment spike (Priority: 5/5): She explains disinflation through a sector-by-sector lens, emphasizing easing supply-chain frictions, normalizing inventories, and weaker pricing pressure in autos and other goods, rather than only demand destruction. Household balance sheets and consumer bifurcation (Priority: 4/5): Coronado says households entered the tightening cycle in strong shape overall, but there is a split between higher-income homeowners and lower-income renters or car buyers who are more exposed to inflation and higher rates. Fiscal policy as capacity building (Priority: 4/5): She pushes back on the idea that deficits are automatically inflationary, arguing that recent spending has often funded capacity—especially energy transition and infrastructure—rather than just demand. Markets, valuations, and systemic risk (Priority: 3/5): The discussion covers why credit spreads remain relatively tight, how tech and crypto may be sensitive to rate changes through valuations, and where hidden leverage could still produce surprises.

Key Arguments: The Fed’s rate hikes work with long and variable lags because credit does not reprice instantly, especially when borrowers think rates will eventually fall and delay refinancing or project cuts. Commercial real estate distress is highly idiosyncratic, but in places like Austin the overhang of new supply, vacancies, and subleasing can still create layoffs and local economic headwinds. The disinflation story is not just recession-driven; it reflects sector-level normalization, especially in autos, where supply chains and inventories have improved alongside softer demand. Inflation dynamics are now more diffuse and healthier than in the 1970s, with some prices rising and others falling, which supports a lower inflation regime. Household debt looks less alarming when measured relative to income; consumers are not broadly binging on credit, though lower-income groups are more stressed. Recent fiscal spending should be evaluated by purpose: pandemic transfers boosted demand, while current green and industrial-policy spending expands capacity and can reduce bottlenecks. The Fed is still pessimistic about inflation and may be overestimating how much additional tightening is needed, while inflation improvements may prove more durable than policymakers expect. Credit markets can remain calm even when policy is restrictive because weak borrowers may already have been squeezed out and many risks are concentrated in equity valuation rather than debt.

Data Points: Stock Movers format: 5 minutes or less - Bloomberg promo describing the new daily podcast report format Austin commercial real estate pipeline: By far the highest in the nation; at record highs by many measures - Coronado on the scale of Austin’s office and multifamily supply overhang CRE supply horizon: 12 to 18 months - Projects in the pipeline expected to come to market over the next year to year and a half Texas unemployment: Underperforming the national average - Coronado notes Texas joblessness has risen more than average, unusual for the state Fed rate cuts outlook: 2024 cuts pushed out / not forthcoming - Discussion of the Fed’s higher-for-longer messaging and raised dots Real rates: Up 50 basis points - Markets repriced after the July FOMC meeting toward higher-for-longer Inflation peak/decline: Around 9% to 3-something% - Joe references the inflation drop over the past year FOMC meeting: September - Coronado says the Committee’s forecasts looked unusually pessimistic and unanimous Household debt-to-income: Back down; credit card debt as a percent of income declined in Q2 - She argues nominal debt levels are misleading Generational rate shock: From zero lower bound to sharp hikes - Coronado frames the current tightening cycle as unprecedented in recent years

Pivotal Quotes: "The banking channel as one that could go nonlinear" — Julia Coronado: Describing how CRE stress might spread into the broader economy through banks "It’s better to have as many possible perspectives and points of view to understand these dynamics" — Julia Coronado: On why the Fed should consider sectoral and supply-side analysis, not just traditional macro framing "We need to think more expansively about what are we doing? What are we getting for this money? It’s not all just going straight into demand. It’s going into capacity." — Julia Coronado: Explaining why fiscal spending on energy and infrastructure can be disinflationary

Implications: Listeners should expect more lagged effects from Fed tightening, especially in credit-sensitive sectors like CRE, housing, and smaller banks. But household demand may stay resilient, and fiscal/industrial spending could offset some slowdown by expanding capacity rather than fueling inflation.