This is not a formal post about Tuesday’s election. But with the benefit of “revealed preference” a/k/a 20/20 hindsight, it’s pretty clear that the Fed rate hikes were an important part of why Kamala Harris and the Democrats failed.

Because we may or may not be experiencing a “soft landing” in the economy, but it came at a steep price to some important demographics.

Let me start by going back to a graph I ran a few times about 18 months ago, when just about everyone including me thought that a recession was at least fairly likely. This is the graph of the *steepness* of the Fed rate hikes:

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Between March 2022 and August 2023 the Fed hiked rates by 5.25%, even in nominal terms the steepest rate hike regimen in 40 years.

Further, in “real,” inflation adjusted terms rates went from -8.3% in May 2022 to +2.0% only 13 months later:

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Even now rates in real terms are 2.7% higher than one year ago (graph above norms that value to zero for easy comparison). Outside of the 1980s this is one of the highest such “real” levels in the past 60+ years, and in most of those cases it was right before recessions.

Not only is the current *level* of “real” interest rates very high, but it was a throttling that occurred very quickly, as is shown in the below graph which takes the same data as above, and measures the YoY change in the *pace* of Fed rate hikes or decreases (red line shows the same data minus shelter inflation, more on which below):

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Only the Volcker rate hikes of 1980 were steeper.

In other words, in the last 2.5 years of Biden’s term, the Fed hiked rates to extremely constrictive *levels* compared with inflation, and it hiked on a much *faster* basis.

This is a recipe for a drastic slowdown in consumer behavior, and it hit one group the hardest: young people trying to buy a home, move up to a bigger home, or rent an apartment for the first time.

To wit: mortgage rates topped 7%, the highest level since the turn of the Millennium. As a result, monthly mortgage payments on equivalently priced housing nearly doubled.

To make matters worse, the price of houses (dark blue) increased nearly twice as fast as the pace of wage increases, while the cost of rent (light blue), after initially being restrained during the COVID moratorium, also rose faster than wages:

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So if you are the typical demographic for a new homebuyer or renter, the Fed rate hikes killed you. And that shows up very much in housing starts and permits:

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Starts declined -31.7% through July from their 2022 peak, and the less volatile permits declined -20.4% through their lows in May. Outside of the near recession of 1966 and the mid-1980s, this is the only time such levels of decline have not coincided with a recession.

And on Tuesday, the preliminary evidence is that young people took it out on the Democratic ticket, either by voting for Trump, or just staying home.

As a postscript, just on time for a new GOP Administration to arrive, the Fed is helping out by a rate-lowering regimen.

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