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Which Industries are Most Affected by Fed Rate Increases?

NC State statistics grad students, Shaoyu Wang and Bryan Bittner collectively worked on a project to analyze the impact of the federal rate hikes on various industrial sectors.  I challenged them to see if the impact of federal rate hikes could be observed on other industries – and here is what they discovered.  Great job!

Federal Housing Policy and its Broad Economic Impacts

The project involved collecting rate and industry data published on FRED, analyzing the data, creating custom ARIMA models in R, and using predictions from the models to determine if the sector was impacted by a federal rate hike.

As is the case with most time series datasets, the data we used contained a lot of “noise”. In particular, the pandemic effects caused undesirable results in our modeling output. Attempts were tried to account for the pandemic months, but in the end, the decision was made to exclude data that was deemed to be heavily impacted by the pandemic. This allows for results that were most directly related solely to the federal rate hikes.

To measure the impact of a federal rate hike, multiple scenarios were created. All scenarios involved training an ARIMA model on past actual data and predicting values on future data with different levels of federal rate increases. The industrial sector that was most negatively impacted by a federal rate hike was the Wood Industrial Sector. The models predicted that even a small, 25 basis point increase would cause the sector to decrease 0.51%. A full 100 basis point increase would cause an overall sector decrease of 2.03%.

Conversely, there were sectors that experienced gains instead of losses. The Fabricated Metal sector showed a 0.54% increase on a 25-point increase and a 2.17% increase on a full 100 basis point increase. These percentages may seem small, but they could easily represent billions, if not trillions of dollars being impacted. Overall, the project delivered the broader economic impact from a federal target rate increase. Based on the results, it could be given more targeted subsector results in future research. A copy of the full report can be found here.