It used to be that capacity utilization was a signal for The Federal Reserve to raise or lower their key target rate. When capacity utilization rose above 80%, the economy was deemed to getting “hot” and The Fed would raise rates. And vice-versa.
But then mass outsourcing occurred, primarily to China and southeast Asia. Since the 1970s, the general trend in US capacity utilization has been downward. But the last time the US saw capacity utilization of above 80% in Q4 2007. Capacity utilization almost hit 80% in August 2018
Oddly, The Fed started raising their target rate in 2015 under Fed Chair Janet Yellen AS CAPACITY UTILIZATION WAS FALLING. Capacity utilization hit almost 80% as The Fed put the brakes on rate hikes before Covid struck.
So, capacity utilization was obviously not on the mind of Yellen and the FOMC. Call it the new abnormal.
With capacity utilization falling, the path of Fed policy rate has shifted sharply over the past couple of weeks, to currently pricing first hike into the September 2022 FOMC meeting and second hike by February 2023 — there are now 100bp of rate hikes priced by the end of 2023, in line with the Fed’s dot-plot forecast.
Short-dated volatility on front-end U.S. rates — known as the upper left corner of the volatility surface — continues to catch a bid over the U.S. morning session, spurred by a sharp hawkish re-pricing of the Fed’s policy stance.
The face of abnormal Fed policies.
