When uncertainty soars and the narrative changes, financial markets can whipsaw investors. The past few months have been a classic example of that.
The unpredictability around Omicron sparked volatile swings in stock, bond, and commodity markets worldwide. Federal Reserve Chairman Jay Powell contributed to the turmoil by changing the interest rate narrative. He unveiled a faster unwinding of the bank’s purchases of bonds as he jettisoned a ‘’transitory’’ view of inflation, opening the door to rate hikes in 2022.
Americans continue to buy appliances, furniture, new and used cars, and pricey homes. Such strong spending despite the well-known supply chain delays and multiple sticker shocks is contributing to inflation remaining uncomfortably high for longer than many would have expected.
Turning to Omicron, it’s likely a lose-lose situation in terms of inflation. If the threat continues to increase, it could spark higher prices by hobbling supply chains again. On the other hand, a fading of Omicron green lights another round of economic reopening, which could exacerbate the current problem of too much demand outstripping limited supply.
Painful as it may be the Federal Reserve interest rate hike may be precisely what the U.S. economy needs. Higher rates may cool Americans’ willingness to pay seemingly any price for goods and homes as the cost of borrowing rises. Additionally, rate increases may relieve the pressure on businesses to raise wages to attract the workers they need to meet seemingly insatiable consumer demand. These interest rate increases, in turn, may put a chill in inflation’s streak of hot readings.
First, we don’t see a need to panic or rush to make changes simply because the Fed is set to raise rates and inflation is currently high. In our view, the prospect of a moderate amount of interest rate hikes that lifts the Fed Funds rate off of 0% is unlikely to derail equity markets given Gross Domestic Product growth and corporate earnings are as strong as they currently are.
And based on what we currently know, the rate hikes next year are unlikely to be large enough to alter the fact that bond yields remain at historic lows. Lastly, inflation is inherently hard to predict, as this year has amply shown.
All of us at WealthPartners wish you a happy start to 2022.
John Beers is the Director of Planning and Investments at WealthPartners, creating and monitoring financial plans and overseeing the buildout and performance of portfolios.
Before joining WealthPartners, John held a senior operations position at a hybrid robo-advisory firm in Colorado. Prior to that he gained experience as a financial advisor for an independent Denver advisory firm. One of his most remarkable business ventures was his involvement in a food start-up that hit it big when featured on “Shark Tank” and partnered with Mark Cuban.
John is a graduate of the University of Arizona with a Bachelor of Arts degree in History. He spent ten years as a whitewater rafting guide in Colorado and Arizona. John and his wife, Lauren, now live in Madison, and have two children, Pete and Molly.
