We’re in a pretty interesting juncture in the markets. As we kick off the third year of the COVID-19 pandemic, the omicron variant is spreading across the country.
As of this writing, the Centers for Disease Control and Prevention reported there have been approximately 68.7 million cases of COVID-19, with the current seven-day average being approximately 783,922. That’s a significant increase from a seven-day average of roughly 416,357 at the start of January.
The rise of variants is among the trends that will impact the market this first quarter of 2022. Other trends we’ll cover in this article include potential changes in Federal Reserve policy, impact of behavior changes spurred by the pandemic, the rise of wages and inflation and geopolitical risk.
The biggest thing people are focused on now is what the Fed is going to do and how quickly it’s going to do it. We would expect the Fed to tighten up its policy to some degree.
Fed Chair Jerome Powell, who was nominated by President Donald Trump and recently renominated by President Joe Biden, had been criticized prior to the pandemic because the Fed raised rates and ultimately had to backtrack some of those increases.
As soon as Powell was nominated again, there was a fairly abrupt change in overall Fed policy, which was to start tapering its bond holding purchases more quickly. And while this in itself makes very little difference to the overall economy, its significance is that it moves up the date the Fed might raise interest rates.
Think of it like this: The economy has an interest rate that is somewhat sustainable, and it needs a certain degree of risk-taking and activity to generate enough economic growth to keep it working. When that economic activity gets too low, then the Fed lowers interest rates in order to speed up activity and incentivize people to continue to take risks.
The rates are lower than they were five to 20 years ago, having gradually gone down over that time period. So the question that we wrestle with is how much can the Fed raise interest rates before it slows the economy too much?
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