The Fed has a narrative. They have a lot of narratives, actually. But an oft-repeated talking point says rate hikes have worked on interest rate-sensitive sectors of the economy.

The reason policymakers find themselves parroting that line over and over again is simple: It’s not obvious that rate hikes have had much of an impact in the US. It’s possible that policy settings, despite the most optically aggressive rate-hiking campaign in a generation, actually aren’t all that restrictive, if they’re restrictive at all.

That’s the r-star debate. If the elusive, unobservable neutral rate of interest is higher in the post-pandemic, war era, then policy settings that would’ve counted as meaningfully restrictive pre-COVID might not be such an imposition in the new macro regime.

I buy it. The idea that policy’s not especially restrictive, I mean. 2020 and 2021 afforded both households and corporates a historic refi opportunity and both the variable-rate share of household debt and corporate interest payments fell as a result.

The figure above suggests that neither consumers nor corporates are likely to be impacted by higher rates in the near-term.

Small wonder the US economy continues to outperform, driven by consumption. It’s true that credit card debt is at a record (well in excess of $1 trillion) and that delinquency transition rates are rising. It’s also true that not all businesses are created equal when it comes to funding mix and maturity wall. But generally speaking, it’s fair to assess that the monetary policy transmission channel may not be as efficient this cycle.

One place rate hikes have worked, though, is housing. Albeit perhaps not always in the way the Fed imagined. I doubt it was their intention, for example, to keep prices high by constraining the supply side of the equation (i.e., the “golden handcuffs” phenomenon). But policymakers can fairly point to residential investment as evidence that monetary policy still functions in the traditional way. Again: The counterpoint is robust spending. Stubbornly robust spending. The figures below, from BofA’s Michael Hartnett, illustrate the juxtaposition.

We’ve just witnessed a singularly spectacular consumption recovery in the US (figure on the left) and a historically lackluster residential investment recovery (figure on the right).

“Stimulus and [a hot] labor market meant a four-year recovery in US consumption from the COVID lows” that was “the fastest since 1945,” Hartnett wrote, in the latest installment of his popular weekly “Flow Show” series. “[By] contrast, [the] much-hyped capex recovery ranks [just] seventh out of 12 recoveries since World War II,” he went on, adding that the housing recovery is “one of the worst.”

What does this mean? So what? Well, the simple point (and this brings us quickly full circle) is that the US is a consumption-driven (consumption-addicted) economy and notwithstanding a very poor read on retail sales for January, rate hikes have generally failed to curb consumer spending even after the fiscal transfers which powered the pandemic recovery faded. Consumer spending primarily happens in the services sector (particularly given lingering “revenge spending”), and the services sector is where the sticky inflation lives.

If the Fed’s argument against the notion that rate hikes are ineffective rests on the idea that they’re working in housing, it’s a moot point in the context of the effort to engineer below-trend growth in the service of beating back inflation. In fact, it may be that by keeping home prices elevated, high rates are contributing to the spending impulse through the wealth effect channel.

To be fair, officials have conceded most of these points. The January FOMC minutes, for instance, admitted that, “As an upside risk to both inflation and economic activity, participants noted that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year.”

So… more rate hikes?