The month of January on a general basis fills the market with optimism as investors enter the new year with confidence that everything must go up.
The big question is how does this year relate to previous years given the high inflation environment that we’re sitting in.
2021 saw a month-on-month inflation rise from 1.4% in January of 2021 to 6.8% in November of 2021, stagnating around the 5.4% mark during the middle part of the year before accelerating past 6%. The crucial part of the acceleration of inflation is that the Fed had an adjusted target in mind of 3.2% for the end of the year with the only real action taken to start tapering asset purchases that came into action in October of last year.
Tapering is set to end in June of 2022, the consensus from Economists is that the Fed will only consider interest rate hikes once tapering is completed.
On the one hand, high inflation is a driving force of economic growth if kept under control, however, consumers do suffer the brunt of the rising prices as it gets shifted to the consumer.
The fact that inflation is just shy of 7%, as November’s inflation number came in at 6.8% the Fed might very well start considering increasing interest rates sooner than expected. Going by their recent FOMC statements there’s a continued emphasis on inflation being cyclical and that they still have all the tools necessary.
The next FOMC statement, as well as CPI reports, will be crucial in establishing if the Fed will remain Dovish or if a Hawkish stance will be taken to get inflation under control following the rate of fiscal stimulus that has gone into the economy over the past two years.
The major factor will be the Fed’s decision if there will be a continued upward trend in the US Equity market if they do continue to be Dovish expect US equities to continue their upward movement. However, given an interest rate hike is on the horizon there could be a possible downside coming as investors shift to a risk-off environment.