Following the most aggressive interest rate increases in the last 40 years, the Fed decided to leave rates unchanged in June, framing the decision as a pause. Although history shows that changes in the Fed’s policy typically take six to 18 months to work through the economy, the Fed’s rate hikes have created a dichotomy between different sectors.

Spending on services, which constitute about 78% of GDP, continues to be strong and expansionary even as economic growth has slowed.* As a result, inflation related to services remains well above the Fed’s target.

Alternatively, the sectors most sensitive to rising interest rates have stalled, including manufacturing and the real estate sectors. In fact, the manufacturing sector has been contracting for seven months. So while the Fed’s aggressive policies are having an impact on the manufacturing and real estate sectors, together they make up only about 18% of GDP.



Over the last 70 years, manufacturing has declined from almost a third of U.S. GDP to only about 8%. The shift to a much larger services sector, which is much less sensitive to interest rates, means that we now have a historically weaker transmission mechanism of monetary policy. In other words, the long and variable lag of monetary policy may have gotten even longer.


Buckingham’s Investment Policy Committee (IPC) is a committee for Buckingham Strategic Wealth, LLC and Buckingham Strategic Partners, LLC (collectively Buckingham Wealth Partners) and not a committee for independent members of the Buckingham Strategic Partners community.
*Larry Swedroe, Advisor Perspectives. “Second Quarter 2023 Economic and Market Outlook: A Tale of Two Economies.” June 26, 2023.
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