Fed’s Hammack Expects Rates to Be On Hold for Some Time

"When I'm out in the district talking with businesses... they're looking to make more investments in their businesses and they think demand is going to be reasonably robust." When businesses "make investments," they spend on Capital Expenditures (CapEx)—machinery, facilities, and automation. This spending flows directly to the top line of Industrial companies. A "healthy" economy with business optimism signals a cycle of re-investment. Long Industrials (XLI) captures the upside of corporate CapEx spending. If the "disappointment" in the jobs report accelerates into a broader recession, businesses will cut CapEx immediately.

"The banks that I've talked to in the district see that their loan growth is improving... business leaders... they're still willing to make investments. They're taking out loans." Regional bank valuations are often depressed by fears of a credit crunch or a recession-induced lending freeze. Hammack's proprietary district data suggests the opposite: loan demand is robust and growing. If loan books are expanding despite current rates, regional banks are healthier than the macro narrative suggests. Long Regional Banks (KRE) to capture the disconnect between "recession fear" and the reality of improving loan growth. Commercial Real Estate (CRE) defaults could outweigh new loan growth, damaging bank balance sheets.

"I think we could be on hold for quite some time... Inflation has been above our target for five years. We've made virtually no progress over the past two years. We're still right around 3%." The bond market often prices in rate cuts at the first sign of labor weakness. However, Hammack explicitly prioritizes the sticky 3% inflation over the "stabilizing" labor market. If the Fed holds rates flat to fight sticky inflation, long-duration yields will remain elevated (or rise), causing bond prices to fall. Shorting long-duration treasuries (TLT) aligns with a "higher for longer" reality where 3% inflation prevents the Fed from easing. A sudden, severe collapse in the labor market could force the Fed to cut rates regardless of inflation, causing bonds to rally.