Are Fed Interest Rates Still on Track for Pullbacks?

The Fed had big plans for 2022. After 2 years of stimulus, big disruptions in the market, and high inflation, 2022 was going to be the year to get back to financial stability. The Fed announced that it will increase interest rates 5 times throughout the year, while some predicted that it will be up to 7.

Within the first two months of 2022, the economy already had to deal with two major financial disruptions: Firstly, the Omicron variant which caused additional supply chain issues and many workplace shortages. And secondly, the Russian invasion of Ukraine which is causing huge export and human resource problems from both countries, most importantly natural gas and oil from Russia.

Inflation is already at a record high, and fast rising energy and gas prices can cause even greater price increases across the board. With all of the additional instability going on, will the Fed continue as planned by raising the interest rates at least 5 times in 2022?

Fed’s Goals

After 2 years of economic stimulus and lowering interest rates in order to encourage borrowing and spending, the Fed is trying to move away from these policies. It’s in the best long term interest of everyone to move back to healthier rates with a higher probability of economic stability.

In a recent announcement, Federal reserve chair Jerome Powell explained which part of the supply chain the Fed is trying to tackle. As opposed to other government policies, they are trying to fight inflation by influencing demand instead of supply. “There is an elevated level of demand in the face of supply side constraints, and it’s the collision of those two things that’s creating inflation.”

In January, the preferred measure of price gains, or personal consumption expenditures (PCE) price index, increased a whopping 5.2% in January, 2022, in comparison with the previous year. This 38 year high is a far cry from the central bank’s inflation target of 2%.

The producer price index, which measures final demand, or what suppliers charge, also reached a record high of 9.7% in January from the previous year. The Fed is trying to reduce these numbers by a large margin in order to even out the demand and keep prices more stable.

“There is an important job for us to move away from these very highly stimulative monetary policy settings to a more normal level of rates, and that is what the committee plans to do,” Powell explained. At the same time, policymakers “will use our tools to add to financial stability, not to create uncertainty."

Potential Changes

Although the Fed hasn’t officially announced any changes, there is room for skepticism amongst many financial experts. Recent events have caused a whole new set of influences on the market and many are wondering whether all 5 of the interest rate hikes will go according to plan this year.

However, Powell has said that it is still extremely important to go ahead with the rate increases and “let our balance sheet shrink”. This suggests that the central bank is very likely to raise the benchmark interest rate by a quarter of a point at the scheduled March 15-16 meeting as planned and set the tone for the rest of the year.

But it’s not that simple. In the same announcement Powell said that the Fed “will need to be nimble in responding to incoming data and the evolving outlook. The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions and of events to come remain highly uncertain.”

This addition made it clear that the Fed is willing to be flexible and is very open to the idea of changing policies if need be. But if it does go according to plan, the first rate hike since December, 2018 will be a ground breaking first step on a long path to stability.

Key Takeaways

• It is unlikely that the Fed will cancel all of the 5 (or more) interest rate hikes, but it is also very possible that they will cancel, delay, or change some of them. Both sides are quite realistic and can affect individual business aspects, as well as the market as a whole.

• Successful CFOs and executives need to think ahead. If anything, the past few years have taught us that for the good and the bad, market volatility is a bigger part of business than many care to admit. Scenario planning is more important than ever, and the amount of data and angles that predictions need to cover have increased tremendously in the past few years.

• Part of thinking ahead is utilizing all of the tools available for times such as these. This includes both technological tools and human resources. Making sure everyone is on board with the situation and potential outcomes will help give a broader perspective and professional advice. Tools such as FP&A automation will help gather as much data as possible and provide in depth forecasting scenarios.

• Thinking outside the box by diversifying as much as possible is one way to mitigate the risk of the unknown. CFOs can also form strategic alliances with those who can provide solutions in order to alleviate some of the supply chain pressures and even stay ahead of the game. This is true for physical goods as much as services.

With no official schedules or announcements made, it is hard for anyone to say how the interest rates will pan out. In addition, the added caution on the part of the Fed due to the unknown creates an extra layer of difficulty. Despite all of the new developments, 2022 still hopes to be the beginning of a healthier and more stable economy.