Some investors celebrated the Federal Reserve’s interest-rate hike on July 26 with the view that it may be the last increase for this cycle. We are not so sure; the US is a complex economy. California may be backpedaling because of restructuring in Silicon Valley and a massive union strike in Hollywood. On the other hand, Florida is experiencing unusually tight labor markets in the major hospitality and agricultural industries, while Texas is buoyant with oil-induced wealth. The Fed is going to take some time to make another interest-rate decision.
In early July, an important commentary published by the Federal Reserve Bank of Dallas earned less circulation than we would have thought. In “Gazing at R-Star,” the analyst notes that even though interest rates began to tighten in March 2022, it took at least nine months for monetary policy to turn restrictive. R-star is the so-called natural rate of interest. In that sense, monetary policy has only been tight for as little as six months, which may not be long enough to move the needle on inflation. Dallas Fed Chair Lorie Logan tends to be hawkish.
We often suggest that many US-based market practitioners poorly understand inflation because we have lived without any sustained upside price momentum for a generation. Central bankers bring deeper and wider context to the table. The risk here is that interest rates will stay higher for longer-than-expected. At least for now, inflation, not recession, is their primary concern. ■
Learn more at the Federal Reserve Bank of Dallas
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