The Federal Open Market Committee (FOMC) gathers this week for the first time in 2022 (they are scheduled to meet 7 times in 2022). Federal Reserve Chairman, Jerome Powell, and committee members are tasked with their dual mandate to promote maximum employment and stable prices. Additionally, policymakers will update their Summary of Economic Projections (SEP) and heavily scrutinized “dot plot” chart, including forecasts and most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, inflation, and interest rates for each year from 2022 to 2025 and over the longer run.

As the committee will set their interest rate policy (most likely a 25-basis point increase or one-quarter of a percentage point hike), they will likely spend most of their time discussing inflationary and real GDP growth economic pressures. The Fed is set to pivot from its dovish and more accommodative policy used to help stimulate the economy through the pandemic to a tighter and more hawkish policy aimed to stem the rise of prices for goods and services. The latest Consumer Price Index (CPI) reading, a measurement in the change of prices paid for a basket of consumer goods and services, rose to levels not seen since 1982. Energy, food, and shelter were the largest contributors to the price gains.

Geo-political risks and emerging Covid lockdowns weigh on the Federal Reserve’s future policymaking decisions. The Russia-Ukraine conflict and China’s zero-Covid approach (Shenzhen and Shanghai lockdowns) wreak havoc on the global economy including oil prices, which have spiked to their highest level since 2008, as well as adverse global supply chains and overall slower global growth.

Meanwhile, the U.S. unemployment rate is running below 4% with consumer and corporate balance sheets as healthy as ever. Corporate profits have continued to come through, however prices have come down, leading to a contraction in the S&P 500’s price-to-earnings (P/E) multiple. The broad S&P 500 index traded at 21.9 times forward earnings at the beginning of the year to 18.4 today (a 16% multiple contraction).

Bottom line, the Federal Reserve will continue to adapt and address policy based on the fundamentals of the economy. Geo-political risks remain elevated.  Corporate and consumer balance sheets remain healthy. And stock market valuations look more attractive.



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