“Investors should be prepared for the ground to shift repeatedly in 2022,” says Raymond James Chief Economist Dr. Scott Brown.
To read the full article, see the Investment Strategy Quarterly publication linked below.
The U.S. economy experienced a number of surprises in 2021 – some good, some bad. The outlook for the coming year is likely to be even more volatile with inflation and Federal Reserve (Fed) policy as the major factors.
- The outlook for the coming year is likely to be more volatile than 2021 with inflation and Federal Reserve (Fed) policy as the major factors.
- Key components of GDP – consumer spending and business fixed investment – rose at an annual rate of 11.7% and 11.1%, respectively, in the first half.
- Near-term inflation expectations have risen, but longer-term inflation expectations have remained consistent with the Fed’s goal.
- GDP growth should be slower, but still beyond a long-term sustainable pace. Our expectation is GDP growth will be approximately 3.5% in 2022.
Higher inflation in the spring of 2021 was narrow and expected to be transitory, but by the end of the year, there were growing fears of a more persistent, broader increase in inflation. With that, financial markets expect tighter monetary policy and a possible policy mistake. Time will tell, as they say, but investors should be prepared for the ground to shift repeatedly in 2022.
The Fed appears to face a tradeoff in 2022. If it waits too long to raise short-term interest rates and higher inflation becomes more rooted, it will eventually have to raise rates more to get inflation back down, slowing economic growth and risking a recession. Most likely, the Fed will begin to raise short-term interest rates by the middle of 2022 and proceed gradually, but a lot depends on the evolution of the economy.