Baker Market Update – wk210917

This week’s economic data were welcome news for the Federal Reserve, showing both a slowdown of inflation and an unexpected increase in Retail Sales. The Fed has long held to its expectation that the recent spike in consumer prices was driven by temporary pandemic related factors and the currently higher than desired level of inflation would be “transitory.” Tuesday’s release of the Consumer Price Index (CPI) seemed to confirm that expectation as the index rose just 0.3% in August, smaller than expectations for a 0.4% increase and a third as much as the 0.9% increase just two months ago in June (see Chart 1 below). A big reason for the moderation of CPI since early summer was the 1.5% drop in Used Car Prices in August versus the 7-10% increases each month in the Apr-Jun period. Also contributing to the moderation was the 2.3% drop in the price of Transportation Services which includes airfares. As more pandemic related bottlenecks in the economy and the supply chain continue to work themselves out, the Fed is betting the recent moderation in prices will continue and inflation will ultimately average 2% over time.

We won’t have to wait long to hear from the Fed as the FOMC meets this week and will release updated economic projections on Wednesday. While no one is expecting a significant change in the Fed’s statement, analysts will be closely watching for any potential news on two fronts. First, the Fed will release an updated “Dot Plot” and we will be looking for any indication FOMC members have altered their view of when and how quickly the Fed should begin raising rates (currently pegged at 2 hikes in 2023). Second, Chairman Powell’s press conference will be closely monitored for any additional indication the Fed is getting closer to “tapering” their $120 billion of monthly bond purchases. Economist recently surveyed by Bloomberg expect an official taper announcement to come in November with the slowdown in bond purchases beginning in December or January and lasting 6-10 months. So far, the Fed has managed expectations of the upcoming taper much better than it did in 2013 when the Fed spooked the market with poor communication and the 10yr Treasury Yield rose 140bp in four months before falling all the way back to record lows by 2016. This week the 10yr yield rose just 3bp to finish the week at 1.37%.

Source: Bureau of Labor Statistics

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The Baker Group's Ryan Hayhurst

Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP

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