2022 will certainly be an eventful year. The likelihood of an early Federal Open Market Committee (FOMC) policy rate hike has all those holding cash feeling a little better at the potential to actually earn some interest. The prospect of higher inflation for a more sustained period of time has some members of the FOMC concerned, although it has not seemed to impact consumer behaviour as of yet. Consumer confidence has been pushing to get back to pre-pandemic highs and holiday shopping has been robust. Many folks got an early start, some as early at June, in anticipation of supply chain issues. So far we have not heard of too many challenges, or perhaps people are shifting their demand to what is available.
In the Fed’s Summary of Economic Projections, the Fed raised their inflation expectations from their September projections. As Fed Chair Jerome Powell indicated, the committee recognises that ‘transitory’ is no longer applicable to current price pressures in the economy. From my perspective, the employment picture requires the most attention in 2022. If the US participation rate (Figure 1) does not increase, then upward wage pressure should persist. This harkens back to the good old supply-demand intersection from our Econ 101 classes. If wage pressure remains
elevated, then workers can afford higher prices for the goods and services they consume, thus limiting any potential pull-back in economic activity. And such is the Fed’s biggest concern: the wage price spiral. It puts the Fed in the position of having to ‘tame’ inflation, perhaps before we reach full employment, by choking off demand with higher interest rates.