On June 17, Kevin Warsh, the new Federal Reserve chair, presided over his first meeting. In comments following the meeting, he said the Fed’s primary focus will be directed squarely at the elevated inflationary environment. By making this statement, the Fed is indicating it intends to place less emphasis on its other mandate, which is maximum employment. This suggests the Federal Reserve is comfortable with what it sees in the labor market.

Warsh’s statement poured cold water on hopes for a series of Fed rate cuts in the coming quarters. Regular readers of this monthly outlook took this announcement in stride, because the 2-year Treasury note yield has signaled for some time now that the market sees a need for rate hikes rather than cuts.

The Fed’s primary tool for moderating inflation is its interest rate-setting policy, known as the “target rate.” By raising short-term interest rates, the idea is to make borrowing more expensive or encourage more saving. Either way, there would be less money in the system available for consumption of goods or services, and that should help moderate prices.

However, things are not quite that simple. Some goods are considered “inelastic,” which means consumers purchase them regardless of price. Some examples include bread, milk and gasoline. This inflationary cost creates more underlying pressure on inflation than elective expenses. For elective expenses, think of lawn mowing services, candy and Pokémon cards. These items are less necessary (or, in the case of mowing the lawn, the tasks can be completed by homeowners) and ultimately tend to be less of an inflationary driver.

If the Fed raises short-term interest rates, does that mean mortgage rates go higher? Not necessarily. The Fed sets short-term rates, while the bond market’s interpretation of the Fed funds rate efficacy determines what longer-term rates will do. For example, the Fed could embark on short-term interest rate increases, and if the market felt the Fed would be successful at reducing inflation with its actions, longer-term rates would tend to drift lower.

Our position on inflation has not changed. We feel we are in a 3% +/- inflationary environment that will not easily be altered by what the Fed does. This suggests 10-year Treasury interest rates are fully priced at a yield of 4.25% and represent fair value around 4.5% to 5%. In this environment, we look for mortgage rates to be about 6.25% to 6.75%.

The bond market responded quickly to Warsh’s comments with lower long-term rates on the prospect of reduced tensions with Iran and the prospect of energy prices returning to pre-Iran conflict levels. Our sense is that may be premature.

We have found that our most productive investment results come from making the best decisions we can along the way rather than waiting for our predictions to come true. After all, our predictions could be incorrect. We have a saying that predictions have only two potential outcomes: lucky or wrong. And wrong has a higher probabilistic result.

Thank you for your business and taking the time to read our monthly commentary!

Greg Sweeney is the chief investment and economic strategist at Bell Institutional Investment Management. He guides the investment strategy, and this outlook is his perspective on the latest market trends and what they could mean for investors. Any views, strategies or products discussed in this article may not be appropriate or suitable for all individuals and are subject to risks.