worstspotgain

The question is not what's affected. It's how much monetary policy it takes to achieve the desired output and employment effect, and where is the employment effect. We want to stop increasing rates once the effect is achieved.

We raise rates because the economy is overheating. Too much money is chasing too few goods, raising prices. In response to the favorable prices, too many jobs are chasing too few workers, raising wages.

Rising prices and wages (without rising productivity) means inflation. We're at one edge of the Phillips curve [1] and need to move back to the middle.

> That may be a goal, but it isn't the goal.

The goal is actually to raise unemployment. That's what the "cooling the overheating economy" euphemism means. However, we don't have the tools to raise it evenly in all sectors. The only tool we have is the short term interest rate.

Luckily, it affects the long term rate, which affects demand for homes, new and existing. For (say) every 20 fewer homes sold, one realtor and one banker might go unemployed. But for every 20 fewer new homes built (say), 50 laborers might go unemployed. That's why the transmission is primarily through construction [2] [3]. The consumer durables sector (appliances) used to have a large multiplier too, but most of those manufacturing jobs have been automated or moved overseas.

> they wouldn't be lagging if the effects must have already happened

You can model the lag effects as geometric decays of the original impulse. You need a negative original effect (one impulse of high unemployment) that will then regress back to baseline (continued but fading unemployment.) We didn't have any impulse, hence no decay.

The only thing that could really go wrong is a resurgence of inflation if the cuts were too fast, but chances are we would have seen that already too.

> relative to where we would have been without intervention

The problem here is we were at too much output/employment. We had to get through that moment and fix the problem without overshooting in the opposite direction.

We couldn't do better, that's the whole point. It's not like there was potentially more output to be had. The actual problem is that output was too high. That's why there was inflation.

As for how the Treasury and Fed managed the crisis, it was easily the most incredible macro success story since I've been alive. Had you told me in 2022 that they'd manage sub-3% inflation without a recession at all, I'd have said you believed in fairy tales.

Unfortunately, housing in most areas was screwed to begin with. This was not nearly the case with prior inflation bouts that required rate increases. The Fed was left with two bad choices. It did what it had to do.

If the economy was Windows XP, housing would be its networking stack - its most exploitable sector. This is largely because of local governance and regulatory capture [2]. Housing has been artificially undersupplied for 5 decades under a variety of pretexts, such as architectural integrity. It has effectively turned the sector into a pyramid scheme that captures the wages of renters.