José Torres, Senior Economist at Interactive Brokers, joined Closing Bell to react to the release of minutes from the Federal Reserve's June meeting, which show the central bank is committed to interest rate hikes as a way to lower demand and control inflation in the United States.

Closing Bell

Federal Reserve Says Higher Inflation Data Led to Increased Rate Hikes

Welcome back cheddar news is closing bell. So we just heard from the Federal Reserve about the state of the US economy, the Central bank reinforcing its goal of more interest rate hikes in order to bring down demand and get inflation under control. More on this. I want to bring in Jose Torres, senior economist at interactive brokers which operates the largest electronic trading platform in the US. So Jose what was your main takeaway from these Fed minutes? Good afternoon, ken. Thanks for having me. Well, stagflation is a real challenge and the Fed is acknowledging the possibility of it continuing in the near to medium term. The minutes provided the appropriate communication in my view, the Fed needs to get inflation in control after being very late in addressing it moving forward. The hope is that inflation can quickly come down before the economy continues to weaken. Its currently weakened, weakening very fast. Unfortunately, historical evidence and the wide variety of economic headwinds make a soft landing very challenging. Do you think that's possible though, with the kind of attitude that we saw in those minutes, with them saying that being more aggressive was warranted. Do you think they still have a chance to bring down inflation and still have that soft landing? It's a slim chance. A lot of it depends on geopolitical um conflict that's going on in Russian Ukraine as well as supply chain disruptions in china. Uh those events are weighing on the Fed's ability to achieve a soft landing. So that's out of their control. Unfortunately, let's talk about sectors and how they're looking at sectors when it comes to this decision. How closely are they watching sectors like oil and housing when they make these interest rate decisions? Well, more so housing very closely. And what we see is that they just started tightening and housing has essentially froze. There's no buyers in sight anywhere. Um, as far as oil, they look at it very closely as well. And while the headlines scream that oil prices are falling really hard and they are, they're still at a Ridiculously high level still at $98 $99 to provide framework. Some of the oil companies in the us are very profitable at a level of $45. So I think they look at oil a lot as a measure of how geopolitics are evolving. So how, let's say so we saw in June they raised it about 75 basis points. Are we seeing that effect yet? When will we see that effect if we haven't We are seeing it. And there's typically a lag, I would say in the current, in the current economy, a lag of about 3-6 months to fully feel those rate hikes. And also there's also um quantitative tightening going on and there's also a stronger dollar going on and central banks tightening all around the world. So there is a lag effect. And like I said, the the the hope is that inflation comes out and they can pivot away from tightening because we're already seeing and they just started tightening. We already we are already seeing in the capital intensive and interest rate sensitive sectors like manufacturing and real and real estate. They're already starting to roll over. So when it comes to the housing market, like you said, there's no buyers in sight. When it comes to inflation, it's still running red hot and when it comes to the job market, it's still pretty tight right now to four job openings, 2 to 1 for those looking for jobs. So what kind of decisions do you think the federal make going into july because they were bouncing between 50 and a 75 point basis hike? What do you think is the is the right move? I think the right move is 75 after being so late. Um They have to they have to be serious on their mandate of price stability. So I would say that they do need to do to 75 when it comes to consumer spending and the sentiment going away from retail goods. We've seen that in the earnings reports when it came to target and walmart and others. How do you think these rate rate hikes are going to affect consumers going into the later months of summer and in the early months of fall, I think it's going to affect consumers very negatively. Um too many headwinds at the same time, too much tightening high commodity prices, a supply chain that's not working with what we're used to with globally global cost effective and integrated supply chain. So I do think that this continues to weigh on the consumer uh, into the coming months. Now the market is turning positive after these fed minutes. Do you think that investors have priced this decision? And what are your, what is your takeaway from the markets reacting well? Um tough, tough, tough. In the short term, sometimes markets move, move in the opposite direction of what, some what, what we sometimes expect them to move in. Um I think that right now the market is, is hoping for a soft landing. Um and also there Tina is a big deal. You know, there is no alternative stocks in the medium to long term are probably the best investment vehicle to navigate these headwinds. So I also think that that's that's a big deal. I mean, do you want to be in fixed income paying, um you know, negative real rates in the US uh you know, stocks can still evolve and US companies can manage inflation and um and and ideally be more efficient than a lot of the other investment vehicles out there, Jose Torres, senior economist at Interactive brokers, If we do have a soft landing Jose hope we can celebrate together. I appreciate you coming on the show