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OUTLOOK 2022/THE ECONOMY >>
The Economy
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to jump the second half of this year — but things will improve.”
One key to what happens with inflation is action on interest rates, said Nakosteen and Pet- rick, noting that the Fed is certainly paving the way for higher rates. In mid-December, the cen- tral bank announced plans to phase out its large- scale bond-buying program faster than initially planned. That will give the Fed more flexibility
to raise rates, and 12 of the 18 members of the Fed’s rate-setting committee expect rates to rise by three-quarters of a percentage point or more in 2022.
While such action is expected to keep higher inflation from becoming more entrenched, there are risks and costs to raising rates, said Petrick, adding that the Fed wants to keep inflation in check without slowing the pace of growth or,
far worse, putting the country on a course to a recession.
That’s what happened in the early ’80s, he said, when then Fed Chairman Paul Volker elevated interest rates to historic levels, which triggered
a recession that, in many historical references, bears his name.
“The Fed wants to make sure it doesn’t jam on the brakes and raise interest rates so fast that they cause the recession they’re trying to avoid,” Pet- rick said. “It’s not good to get a recession named after you.”
Nakosteen agreed, and said that, overall, he’s
in the camp that believes that higher inflation as was seen over the last three quarters of 2021 will be transitory — and not built into the economy, as others predict — but perhaps for a longer peri- od than everyone would like. He also agrees that, while the Fed is talking tough about inflation and the need to keep it in check, its overall response will not be as tough as the talk.
“I don’t think the Fed is going to have to raise interest rates to the point where it’s going to dip us into a recession,” he told BusinessWest. “The economy is going to continue to grow, maybe not as quickly, inflation is going to come down over the next year, and interest rates are going to go up, but not by very much; it will affect the housing market and automobiles.”
Petrick agreed, projecting “pretty rea- sonable” growth for the year ahead, but
adding quickly that events of even the
past few weeks — the rise of Omicron and setbacks for President Biden’s Build Back Better program among them — have tempered some of those expectations.
“At the beginning of December, before we knew the Omicron variant was as prevalent as
it was internationally, growth projections were pretty high, about 4% to 5% globally, and about 4% in the United States,” he said. “And then ... those projections came down to about 3.7% to 3.8%, and now, with the doubts about the Build Back Better agenda getting through Congress, they’ve been downgraded again, to 3% to 3.5% on
an annual basis next year — that’s the consensus that I’ve seen.
“But the first quarter will be pretty quiet, with about 2% growth, which was our average, pre- COVID,” he went on. “And that’s a big slowdown from this year, when we saw 5.5% growth overall, which was expected.”
“
going to have to raise interest rates to the point where it’s going to dip us into a recession.
As for the longer-term picture ... Petrick said the consensus, if there is one, is that there will
be continued growth in 2023, perhaps 2.5% to 2.9%. But as the events of the past few weeks have shown, things can change — and very quickly.
So projecting too far out is obviously difficult. For now, there is widespread if cautious optimism about which way the arrow will point in 2022.
But as Nakosteen noted, the past two long and mostly painful years have shown that there is sim- ply no putting COVID aside. u
— George O’Brien
I don’t think the Fed is
BOB NAKOSTEEN
”
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18 JANUARY 10, 2022
ECONOMIC OUTLOOK 2022
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