Pub. 12 2021 Issue 3

Pub. 12 2021 I Issue 3 Fall 23 West Virginia Banker Jeffrey F. Caughron is a Managing Director with The Baker Group, where he serves as President and Chief Executive Officer. Caughron has worked in financial markets and the securities industry since 1985, always with an emphasis on banking, investments, and interest rate risk management. For more information, contact him at 800-937-2257, or jcaughron@GoBaker.com . one occur. Though they recently adopted a more flexible “average inflation targeting” policy stance, recent changes to the FOMC’s “dot plot” indicate a willingness to move more quickly on tapering asset purchases and a liftoff date for the Fed funds target. In his press conference, Fed Chair Jerome Powell emphasized that policymakers were fully prepared to deal with sustained inflation or self-fulfilling expectations of higher inflation. “We wouldn’t hesitate to use our tools to address that risk. Price stability is half of our mandate.” That should give comfort to those who worry that the recent eye-popping inflation rates might not fade so readily. Make no mistake. The economy has been hot as it recovers and the recent jump in reported inflation numbers has been noticeably and uncomfortably high. Consumer prices rose in June by the most since 2008. But we expected that to be the case for a few months partly due to the “baseline” effect from the bounce off dreadfully low inflation rates early in the pandemic. As the initial snapback from reopening fades, growth and inflation should both moderate. As for output and employment, we have likely seen peak performance for the cycle as the initial massive injection of federal stimulus dollars into the economy begins to disappear. Likely, payrolls’ growth, trade volumes, and consumption patterns will gradually revert to the mean as we move through the second half of the year. The recovery is very much intact, but we already see a pace of growth that is considerably less rapid than in prior months. That may turn out to be the best case if the economy experiences moderate growth and low inflation, as opposed to breakneck growth, shortages, and rising prices. Financial markets see extended stimulus as an unnecessary distortion and crave clarity from policymakers about how and when they will pivot. It is often the case that the Fed is “behind the market” and reactive rather than anticipatory in their policymaking. Time will tell, but maybe they got this one right.  Whereas fear of sustained inflation was a continuous theme for much of the first two quarters, concerns about growth constraints and adjustments to monetary policy are now prevalent.