Don’t Bet on Rates Rising in 2022. Here’s Why.

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News on the Thanksgiving holiday of a new, rapidly spreading COVID-19 virus variant, reappointed Fed chairman Jerome Powell, pictured when tightening, is the proper cover.

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Alex Wong/Getty Images

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Now that Jerome Powell has been nominated for a second term as chairman of the Federal Reserve, the markets seem to know what he’s getting. They may be wrong.

In electing Powell, President Joe Biden gave investors what they wanted: a central-bank chief they know, like, and trust to act as a sort of mysterious pigeon. can, once price stability is maintained, leave monetary policy ultraloose. But a reality check is in order.

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There are two ways there could be economic growth over the next few years, and neither involves both rock-bottom rates and back-to-target inflation. Investors are investing in one way or the other.

Under a less likely scenario, Powell’s second term will become Volker 2.0, says Ed Yardney, president of Yardney Research. It’s a reference, of course, to former Fed Chairman Paul Volcker, who effectively hit the economy on the head with a two-for-four in the late 1980s as he raised interest rates to an unprecedented 20 percent to curb inflation. % was increased. Yardeny put Powell channeling Volker’s odds at 25%. This isn’t his core case, but he calls it a risk scenario that investors shouldn’t dismiss.

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Yardney says of the Fed in terms of inflation, “they have created a mess that needs to be cleaned up,” adding that the groundwork exists for a wage-price spiral for which two to three rate comparisons are in place. More aggressive policy action will be needed. Investors’ expectations rise for the next year.

Consider the recently ratified contract by United Auto Workers and manufacturer Deere (ticker: DE), which includes a quarterly cost-of-living adjustment. The UAW/Deere contract only affects about 10,000 workers; In 1975-76 the number of workers with COLAs was about six million. But economists worry that this decline in the 1970s and 1980s reflects consumers’ difficulty keeping up with inflation, and is a harbinger of a dangerous spiral that occurs when workers pay more to keep pace with rising prices. demand, and in return pay even higher prices. ,

The second scenario, especially in light of renewed Covid concerns, suggests that investors are taking too much policy action. For all of Powell’s means of tackling inflation, there really is only one: raising interest rates. The tightening of monetary policy was not so good the last time it was tried before the pandemic. Powell had to quickly reverse the rate increase he had initiated. And the Fed is about to be even more modest, as Governor Lyle Brainard is installed as vice president and Biden fills three vacant seats on the seven-member policy-making board.

Powell has repeatedly said that the course of the economy and monetary policy depends on the path of the pandemic, which is not yet over. News over the Thanksgiving holiday of a new fast-spreading virus variant gives the Fed proper cover as it tightens up.

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There is a catch however. If the Fed opposes raising rates enough to spur inflation in 2022, Yardeny says officials will have to move the target post. In that case, he expects Powell to raise interest rates no more than twice in the second half of 2022, and predicts the Fed will change its longstanding inflation target from 2% to 3%. Doing so would take more than semantics, with businesses, consumers and investors all adjusting to a new normal.

David Rosenberg, chief economist at Rosenberg Research & Associates, goes one step further. Strong defenders of the long-tolerance and inflation-floating argument also think that interest rates will not rise much, if at all, for a different reason. Rosenberg says the fragility of the US economy has been underestimated. “Inflationists who have been calling for inflation for the past decade are like dogs with bones and they will not let go,” he says. “Risk runs the other way.”

Rosenberg rejects the growing consensus view that inflation has spilled over to sticky spots, like rents, and is being curtailed by troublingly low workforce participation. His forecast? The zero rate increases over the next year and onwards.

“It may be the biggest bet we’ve ever made against market pricing,” says Rosenberg, arguing that by completely underestimating supply’s response to rapidly increasing demand, such as new housing construction. has been estimated.

Furthermore, the Fed may have tied its hands, Rosenberg suggests, effectively making the debate on inflation controversial. The US economy is more sensitive to property prices than ever before, and, in his view, the stock market and housing market are each undervalued by about 15%. “If we get average-reversion in equities and housing, which they are because of interest rates, then you’re getting some humming of an asset deflation,” he says.

He suspects the Fed will not tolerate carnage.

Several recent data points support Rosenberg’s view that the economy is not exactly on fire. A dig into the October retail sales report reveals that almost half of the better-than-expected growth was due to higher prices. Excluding seasonal adjustments that become infrequent around the holidays, and claims for unemployment insurance hit a six-week high in the latest week for the first time, a comparison to hitting a 1969 low for seasonally adjusted claims. Very different title.

All of this makes it worth questioning growing assumptions for a relatively more aggressive Fed policy – ​​not because it isn’t warranted, but because of the constraints policymakers face, whether they like it or not.

write to Lisa Beilfuss [email protected] Feather


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