Several decisions and data points released toward the end of 2021 and beginning of 2022 should be evaluated to better anticipate what to expect for the American economy this year. Federal Reserve Chairman, Jerome Powell, announced in January that the Central Bank would close out its $120B monthly crisis era asset purchase program by the end of March. The Fed also signaled three to five potential interest rate increases in 2022.(1) Additionally, the Biden administration passed the $1.2T Infrastructure Investment and Jobs Act.(2,3) The last variable is the news regarding the Omicron variant of Covid which appears to be far more contagious but far less lethal than the previous strains.(4)
Given this confluence of factors, one must ask three key questions:
1. Why is the Federal Reserve aggressively decreasing its asset purchase program and raising interest rates?
2. How will the infrastructure bill affect inflation?
3. What is the role of Covid in the 2022 economy?
The Fed’s Decisions
When U.S. businesses were shut down in March of 2020 as an emergency effort to slow the spread of Covid 19, we saw the economy come to a screeching halt. In response to this decreased economic activity, our economy was put on life-support through $3.4 trillion in fiscal stimulus passed by congress and the Federal Reserve’s $120B monthly asset purchase program. The Fed planned to end its program once it felt the economy had made “substantial further progress” or heated back up, in other words.
The Fed must monitor this balance between money supply and economic activity closely. If there is too much money circulating along with too much activity, inflation often occurs. The main tool the Fed has at its disposal is interest rates. An increase in interest rates effectively decreases the amount of excess circulating cash. In short, the Fed is looking to cool a potentially overheating economy in 2022, without jeopardizing economic growth.
Government Spending and Inflation
Though the Biden administration successfully passed the Infrastructure Investment and Jobs Act (IIJA), it failed to pass the Build Back Better Act. One of the greatest points of contention seemed to center on inflation worries. If the Fed is tapering its program so as not to overheat the economy, should we be concerned that any further government spending bills being passed would equally impact inflation in 2022?
The answer to that question, at least for 2022, is probably, no. For example, infrastructure spending will be spread out over 5 years. Any additional packages approved will likely carry a similar structure.
Covid-19
More and more leaders in the healthcare community are signaling that pandemic pain will significantly ease by the end of 2022. (5) Given the nature of the Omicron variant, vaccination numbers, and new treatments such as antiviral therapeutics, we are not likely to see any more widespread business closures or emergency orders in response to rising Covid cases in pockets throughout the country.
All in all, it looks like 2022 will be the year many of us hoped 2021 could be for the economy. We should see the ending of emergency measures to mitigate the effects of Covid-19 fiscally, monetarily, and legislatively. Inflation will probably continue to make headlines along with Covid for at least the first half of 2022. Both have proven to be stickier than anyone could have guessed, but even so, 2022 will likely be another year of economic growth.
1. https://www.cnbc.com/2021/12/15/fed-will-aggressively-dial-back-its-monthly-bond-buying-sees-three-rate-hikes...
2. https://www.cnn.com/2021/07/28/politics/infrastructure-bill-explained/index.html
3. https://www.forbes.com/advisor/personal-finance/biden-signs-debt-ceiling-increase/
4. https://www.nytimes.com/live/2021/12/30/world/omicron-covid-vaccine-tests
5. https://www.cnbc.com/2021/12/15/what-living-with-endemic-covid-will-look-like-in-2022-and-future.html