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Fed Faces Tough Decision As Weakness In Construction Sector Persists

Last Updated on March 24, 2023 by Construction Digest

In January, a significant decline in construction job openings highlights the delicate balance that Fed officials must strike as they adjust their plans for further interest rate hikes.

According to government data released on Wednesday, the number of job openings in the construction industry plummeted by nearly 50% or 240,000, to 248,000 in January, marking the largest monthly decline in the 20-year data series.

However, overall job openings dipped slightly, indicating the economy’s overall strength.

The Fed has indicated its willingness to continue raising interest rates at a relatively fast pace due to higher inflation.

However, there is a risk that the four-and-a-half-percentage-point rate hikes delivered over the last year may not have had their full impact yet.

Economist Milton Friedman famously stated that monetary policy works with “long and variable lags,” implying that it can take several years for Fed interest rate changes to filter through the economy.

Therefore, the significant drop in construction job openings, combined with the recent decrease in investment in residential construction and other housing activity measures, suggests that the economy is still adjusting to the previous year’s rate hikes, even as the Fed considers more hikes.

This situation could create conditions for the Fed to accidentally over-hike, resulting in the hard economic landing that many hoped to avoid.

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