Will Jerome Powell Face Stormy 2022?

Will the Federal Reserve have to walk on an economic tightrope in 2022? Fed moves to tighten policy in 2022 amid uncertain economic outlook and Fed Chairman Jerome Powell is entering 2022 with the American economy on shaky ground.

Policymakers may face a challenging year for the US central bank as it accelerates its withdrawal of stimulus, all while navigating the ever-changing landscape of the coronavirus pandemic, this time without the aid of trillions of dollars in fiscal support.

Wall Street forecasters are dialing back their growth projections for next year as fading hopes for the president’s ambitious economic agenda and heightened concerns about the new COVID variant have clouded the outlook.

In many ways, the US is ending the current year in a remarkably similar position in which it began: Although vaccines are now widely available the country is facing a fresh wave of infections, driven by a highly contagious variant.

The economy is on solid footing and is poised to end 2021 with fourth-quarter growth as high as 7%, but economists say there are warning signs looming.

There are serious headwinds to worry about, including inflation is at the highest level in decades. Supply chain problems seem to be insoluble. If these issues keep getting worse, they could derail the recovery.

That creates even more challenges for the Fed, and Powell, as policymakers seek to balance taming the hottest inflation in nearly four decades with ensuring the economy does not slip into another recession as it recovers from the shortest, but steepest, downturn in nearly a century.

The Fed closely tracks inflation and is responsible for keeping consumer prices stable while also pushing for, at least, better employment figures and, at most, full employment.

The coming months could see central bank policymakers forced to make difficult policy decisions as they seek to level between the contrasting goals; although consumer prices rose at 6.8% in November from the previous year, the fastest pace since 1982, the labor market has been slower to reach pre-pandemic levels.
The unemployment rate plunged to 4.2% last month, but there are still about 6.9 million out-of-work Americans.

What’s more, the economy will spend 2022 without the aid of any monetary or fiscal props after a key moderate Democrat withdrew his support for President Biden’s USD 1.7 trillion Build Back Better bill this week. That could leave the economy even more exposed to disruptions caused by the omicron variant, which is already prompting some pullback globally.

The Federal Open Market Committee said at the conclusion of its two-day policy-setting meeting last week that it would double the reduction of its asset-purchase program to USD 30 billion a month, a timeline that could phase out the purchases entirely by March rather than the original June trajectory laid out last month.

Although policymakers voted to hold rates near zero, where they have sat since March 2020, new economic projections show that every Fed official has penciled in at least one rate hike next year, a considerable shift from September, when half of the central bankers believed interest rate increases were not warranted until at least 2023.