Page 11 - ISQ UK_October 2017

JANUARY 2022

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Most likely, the Fed will begin to raise short-term interest
rates by the middle of 2022 and proceed gradually. ”

the pandemic, but the economic recovery no longer needs that individuals. At the same time, consumer spending growth should
much support. Fed officials were worried that tapering could remain supported by a strong trend in wage and salary income.
cause some disruptions in the credit markets, so its approach to Some of the 2021 government support was saved, showing up in
tapering would be gradual. Fed officials emphasised that the deci- higher balances in checking and savings accounts. That savings
sion to taper was separate from the decision to raise short-term will be reduced over time, but should provide some near-term
interest rates. However, the increased risk of more persistent infla- cushion for spending. While consumer spending did not shift back
tion has altered the outlook. from goods to services in 2021, that ought to show up more in
2022 – but a lot depends on variants of the virus. A lockdown of the
In 2019, the Fed revised its monetary policy framework. No longer economy is unlikely, but fear of the virus may dissuade some indi-
would the Fed act pre-emptively to head off higher inflation. viduals from returning to pre-pandemic spending patterns.
Instead, it would wait for inflation to show up, tolerating a mod-
erate increase in inflation, but would still maintain a 2% long-term Strength in corporate profits supported business fixed investment
goal (as measured by the PCE Price Index). The Fed also broadened in 2021. That support should continue in 2022, but at a more mod-
its employment objective, making it more inclusive. Low-wage erate pace.
workers and communities of colour fare the worst during an eco- Geopolitical tensions could be an issue in 2022, but the Fed will be
nomic downturn and are slower to recover in an expansion. the major factor, with the policy outlook expected to vary with the
incoming data. Investors should watch developments closely and
The Fed appears to face a tradeoff in 2022. If it waits too long to be prepared.
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. KEY TAKEAWAYS:
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 outlook for the coming year is likely to be
more volatile than 2021 with inflation and Federal
the evolution of the economy.
Reserve (Fed) policy as the major factors.
So, what does all this imply for the 2022 economic outlook? Much • Key components of GDP – consumer spending and
of the growth in 2021 was a recovery from the pandemic. A key business fixed investment – rose at an annual rate of
factor in the 2022 outlook is that there will be less to rebound 11.7% and 11.1%, respectively, in the first half.
from. With less ground to make up, GDP growth should be slower,
but still beyond a long-term sustainable pace. GDP growth will be • Near-term inflation expectations have risen, but
~3.5% in 2022. Fiscal policy will be contractionary compared to longer-term inflation expectations have remained
2021. Labour market constraints are also likely to remain an consistent with the Fed’s goal.
impediment to faster growth. Higher wages should pull many • GDP growth should be slower, but still beyond a
back into the workforce, providing some upside to the growth out- long-term sustainable pace. GDP growth will be
look, but it’s hard to say for certain. ~3.5% in 2022.

We’re unlikely to see another round of government support for

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