Economic Flash

February 2022 Economic and Interest Rate Projections

by Craig Dismuke, Dudley Carter

Supply Chain Disruption and Labor Shortage Take a Toll on Outlook: The persistence of the supply chain disruption and lack of labor supply has led to an acceleration and broadening of consumer inflation.  While goods inflation is likely to ease in coming quarters as the supply chain heals and elevated demand moderates, services inflation is now expected to keep overall inflation uncomfortably high.  We now expect this faster inflation environment will drive the Fed to liftoff monetary policy more abruptly.  We continue to expect the policy tightening to negatively affect financial conditions, and even more so given the faster liftoff; although, we now believe the Fed will be more tolerant of this given how pervasive the inflation pressure has become.

Inflation Expectations and Likelihood of Emergency Policy Actions: Given the heat and breadth of the inflation data, the question of emergency policy actions has been raised. We see the likelihood of this as low so long as longer-term inflation expectations remain near 2 percent.  Keeping longer-term inflation expectations anchored is of paramount importance to Fed officials given the potential impact an unanchoring would have on longer-term interest rates, and the resulting economic damage.  If cracks emerge in this confidence, emergency policy decisions would be more likely.

Faster Liftoff and More Tenuous Economic Environment Expected: Against the backdrop of hotter inflation and a faster monetary policy liftoff, we have made notable revisions to our growth and interest rate projections.  We now expect inflation to average 4.2% in 2022, dragging an additional 0.7% from nominal growth.  Also negatively affecting headline GDP, much of the inventory turnaround which was expected to provide a tailwind to growth this year occurred in 4Q21.  As a result, we now expect the economy to expand 2.5% in 2022.  To keep inflation expectations anchored, we expect the Fed to hike as aggressively as the market will allow in the first half of 2022 before slowing the pace in 4Q. However, we expect this more aggressive pace of liftoff to increase the risks to an eventual policy misstep.

February 2022 Economic and Interest Rate Projections

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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