The Week in Review: January 31, 2022
Taking Away the Punch Bowl
William McChesney Martin took the helm of the Federal Reserve in 1951 and didn’t relinquish his role until 1970. He once said that it’s the job of the Fed “to take away the punch bowl just as the party gets going”—that is, hike interest rates when economic growth is strong.
The fed funds rate has been holding near zero since the pandemic began. The reopening, low rates, and fiscal stimulus have fueled the strong expansion. The jobless rate is back below 4% (as of December, U.S. Bureau of Labor Statistics). But inflation is at a 40-year high.
Not only did the Fed keep the punch bowl at last year’s party, but it spiked the punch.
Last year, the Fed came under heavy criticism for failing to react to high inflation. This year, Powell seems set to make up for lost time, laying the groundwork for what could be an aggressive rate-hike cycle. Rates may rise as early as March.
At Powell’s press conference, he no longer stressed the importance of job growth. Instead, he called today’s job market “a historically tight labor market, with record levels of job openings.”
And he fretted there is a risk that “high inflation (might be) more persistent than expected.” He did not rule out a rate hike at each of the seven remaining Fed meetings this year, nor did he dismiss the idea of a ½ percentage-point increase at one meeting.
The Fed hasn’t hiked by ½ percentage point since 2000.
Still, Powell did not offer a roadmap this year, nor did he get into specifics regarding the magnitude of what we might see. A key gauge of sentiment from the CME Group suggests we may see at least five quarter-point rate increases this year.
The table below illustrates the Fed’s more dovish approach in 2021. In the past, the Fed would act pre-emptively against inflation.
In 2021, the Fed’s focus was on getting people back to work, and rising inflation took a back seat. Today, the unemployment rate is 3.9%, inflation is at 7%, and the fed funds rate is near zero.
The challenge for the Federal Reserve will be to engineer what’s called a “soft landing.” By that, we mean, can the Fed bring down inflation without causing a recession?
Over the past month, volatility has risen as investors have been trying to price in higher interest rates.
However, economic growth has been strong. Witness last week’s report by the U.S. Bureau of Economic Analysis that Q4’s gross domestic product (GDP) expanded by an annual pace of 6.9%. Vigorous growth = strong earnings.
Put another way, the tailwinds caused by the threat of a hawkish Fed have been partially offset by upbeat earnings.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
A record 5.4 million new business applications were filled in 2021. That’s up from the previous record of 4.4 million in 2020. In 2019, the year before the coronavirus disrupted life as we know it, there were 3.5 million new business applications. —NPR, January 12, 2022
In 2021, nearly half of the global population was affected by malnutrition. However, the balance has shifted: Today more deaths result globally from people being overweight than underweight. — The Hill, April 7, 2021
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1. The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2. The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3. The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4. The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5. CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6. CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.