Financial Samurai: Understand How Rich Central Bankers Think So You Can Outperform
Currently, we have signs of both a slowing economy and inflation rates starting to come down. So it seems odd that central bankers still remain committed to interest rate hikes.
Add in the fact that monetary policy tends to lag by anywhere from six to twelve months, and it’s clear that the Fed could overtighten before realizing it. So why are bankers still committed to hiking rates? It may have to do with expectations.
Central bankers play a powerful role in how people view the economy. If the Fed were to cheer a slight drop in inflation rates, investors may view inflation as no longer a problem. That could lead to the economy remaining stronger for longer, keeping inflation higher.
Right now, the Fed is looking to get inflation back from over 8 percent today to 2 percent. That’s a process that could take some time. But it will go faster with a little bit of economic pain.
For the Fed, that pain point tends to be the job market. Nothing cuts back spending faster than job losses. Even those who don’t lose their jobs may cut back on spending out of fear that they’re next.
With a robust labor market right now, the Fed’s recent calls for more tightening make sense. And that’s why investors should continue to expect interest rates to move higher.