On December 15, 2021, the Federal Open Market Committee (FOMC) of the Federal Reserve System made a significant shift in monetary policy in response to rising inflation. The Committee accelerated the reduction of its bond-buying program in order to tighten the money supply and projected three increases in the benchmark federal funds rate in 2022, followed by three more increases in 2023. Both steps were more aggressive than previous FOMC actions or projections. 

Comments from Chair Jerome Powell on January 26, 2022 reinforced my view that high inflation could push the Federal Open Market Committee (FOMC) to consider hiking the Fed Funds rate at consecutive meetings this year, and that the risks around my baseline forecast of three-four hikes in 2022 are therefore slanted to the upside. The market also took Powell’s comments as hawkish, and 2-year yields rose 13 basis points during and after his press conference.

While Powell did not directly address hiking at consecutive meetings, he hinted at the possibility of a faster pace in three ways. First, he emphasized that the economy is in a very different place than when the FOMC hiked last cycle. Second, he acknowledged the uncertainty about the inflation outlook and said that monetary policy needs to be in a position to address different outcomes, including one in which inflation runs higher. Third, he said that the FOMC would move “steadily” away from its current policy stance, avoiding the term “gradual” used last cycle. (1)

The FOMC also released high-level principles for reducing the size of its balance sheet today, but it is still discussing the details of the process and Powell said he expects that to take at least two more meetings. This makes a May announcement of the start of runoff less likely, and we continue to expect the announcement at the July meeting instead. We expect runoff caps of $60bn per month for Treasury securities and $40bn per month for mortgage-backed securities, which we project would shrink the balance sheet from $8.8tn to $6.1-6.6tn over 2-2.5 years. (2)

Nevertheless, several of the worlds’ largest economies enjoyed notable recoveries in 2021. In the United States, two additional rounds of stimulus payments in the first quarter helped line consumers’ pocketbooks, which led to rapidly increasing demand for goods and services. Historically low lending rates and a rise in remote work increased the opportunity for consumers to spend. However, the rapid economic turnaround brought with it a historic surge in consumer and producer prices, labor shortages, and global supply-chain bottlenecks. Low interest rates and stimulus measures adopted by the Federal Reserve gave people more access to money and buying power. 

Personal income increased as did personal consumption expenditures. Corporate earnings were strong, despite labor and supply shortages and lingering economic uncertainty caused by the pandemic. U.S. inflation reached a nearly 40-year high late in the year, as growing consumer demand was stunted by pandemic-related supply constraints. Historically low mortgage rates helped propel the housing market, as both the number of residential sales and property values escalated. Energy prices, particularly gas prices, rose by nearly 50%, as crude oil reached more than $80 per barrel for the first time since 2014. An influx of day-trading investors collided with hedge-fund investors and Wall Street professionals. So-called “meme traders” impacted stock prices from their sofas through collaborative investing on social media platforms. Cryptocurrency also gained more mainstream acceptance and attention in 2021, with a market cap of all cryptocurrencies topping $3 trillion (3). (source needed) The rapid growth of cryptocurrency also led to more government scrutiny. China’s central bank declared all cryptocurrency-related transactions illegal as that country was determined to crack down on the industry. 

The U.S. economic recovery was highlighted by job growth and dwindling unemployment claims. Employment gains averaged over 550,000 per month in 2021, while weekly jobless claims fell to a 52-year low in December (4). Despite increasing numbers of COVID-related cases, the stock market generally prospered, with each of the benchmark indexes posting year-over-year gains. Each of the 11 S&P market sectors (what is this referring to?) also ended 2021 in the black. Overall, we experienced plenty of change in 2021. The year 2022 should bring continued economic recovery. As the United States and the world inch slowly toward normalcy following the battle against the COVID-19 pandemic, stock markets, employment, and production should also advance. Inflationary pressures are likely to continue, which will most certainly prompt adjustments to the target range for the federal funds rate. Will President Joe Biden and lawmakers be able to reach an accord on a Build Back Better bill? Will the coronavirus continue to mutate and spread? The year 2022 is likely to provide another roller-coaster ride. Plan and be disciplined about your asset allocation strategies. When you need to be defensive, cash can be your friend.

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Mark Martiak is a New York-based Investment Adviser Representative and Accredited Investment Fiduciary ® for AGP/Alliance Global Partners, a registered investment adviser and broker-dealer, Member FINRA | SIPC . Mark is a regular Contributor to VEGAS LEGAL MAGAZINE and has appeared on CNBC’s CLOSING BELL, YAHOO! FINANCE MIDDAY MARKET MOVERS, FOX BUSINESS NETWORK and has been quoted in THE WALL STREET JOURNAL. 

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Such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy. Indexes are unmanaged, and investors are not able to invest directly into any index. Past performance is no guarantee of future resultData sources: 

(1) https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220126.pdf

(2) David Mericle Goldman Sachs U.S. Daily Economics Research

(3) The Ascent, A Motley Fool Service: There’s More Money Than Ever in Cryptocurrencies, but What Does That Mean?

(4) BARRON’S ADVISOR: ECONOMICS Jobless Claims Fall to a 52-Year Low Dec. 9, 2021

Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI, Cushing, OK); www.goldprice.org (spot gold/silver).

News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified, when necessary, with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness