Pub. 13 2022 I Issue 1 Spring 13 West Virginia Banker Jeffrey F. Caughron is Chairman of the Board with The Baker Group. He has worked in financial markets and the securities industry since 1985, always with an emphasis on banking, investments and interest rate risk management. You can contact him at 800-937-2257 or jcaughron@GoBaker.com. allow inflationary psychology to become embedded in the economy, risking a wage-price spiral, pushing households and firms to get ahead of assumed cost increases and resort to stockpiling. That’s the Summers worst-case scenario: a return to 1979. There can be no question that the Fed is right to accelerate the “tapering” and stop pumping liquidity into an overliquified banking system. In their zest to prop up the economy to when COVID was new, they characteristically overdid the job, creating way too much cheap money, distorting financial markets, and fueling asset price bubbles in speculative assets that pose serious risks going forward. The quantitative ease needs to stop. That’s the easy part of the Fed’s task. The hard part is subsequently determining when and how fast to raise rates. The flattening yield curve reflects the dangerous waters the Fed must navigate. Short-term yields have risen commensurate with the expectation of multiple rate hikes. All members of the Federal Open Market Committee (FOMC) now see at least one, and some see as many as four hikes in 2022. Longer-term yields, though, have behaved differently. Despite the new year’s jump, the 10-year yield remains below its March 2021 high of 1.75%. That may change, of course, but the fact that yields in the long end have moved so slowly up to this point has allowed the yield curve to flatten and belies genuine concern about growth going forward. The Fed is indeed walking a tightrope. Let’s hope they’re able to keep their balance.
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