LESSONS LEARNED: ECONOMIC FORECASTS

The Fed’s bark was as bad as its bite!

The Fed’s bark was as bad as its bite! Investors have been carefully dissecting Federal Reserve (Fed) officials’ words for decades, and depending on the composition of the Federal Open Market Committee (FOMC), its bark is often worse than its bite. But this time was probably different. One of the lessons learned in 2022 was to never underestimate our central bank’s resolve to squelch inflation. Another corresponding teachable moment was never overestimate the speed of price declines.

At the start of 2022, markets expected the upper bound of the fed funds rate to stay below 1%. The expectation was predicated on the view that inflation pressures would ease as global economies recalibrated to a post-pandemic environment. But inflation was stickier than anyone anticipated, and the inflation dynamics were further exacerbated by Russia’s invasion of Ukraine and COVID-19-related lockdowns in China. As inflation accelerated in early 2022, especially housing prices, members of the FOMC started warning investors about the need for aggressive action to fight inflation.