Q1 2022 U.S. Macro Outlook

– The world has changed considerably in recent months. Russia's invasion of Ukraine has impacted global oil & gas and grain supplies, aggravating an already tenuous inflation situation. Energy prices will likely remain heightened throughout this year, and we have increased our inflation outlook for 2022 to 6.6%. But because the Federal Open Market Committee (FOMC) is quickly initiating a tightening cycle, price gains for some core items are easing and base effects should become evident in future Consumer Prince Index (CPI) reports. Our Baseline scenario expects the pace of inflation to peak this summer.

– Federal Reserve policy is shifting. The FOMC’s focus has shifted from full employment to price stability. The Committee will soon wind down its quantitative easing program and will likely initiate several rate hikes during 2022. In early May the Fed increased its target rate by 50 basis points (bps) and may do so again during the summer. This would likely be followed by three 25-bps hikes later this year.

 

– Everything from very high levels of job openings to rising wages for ‘essential’ workers suggests the labor market is extremely tight. The cause is two-pronged as quickly rising demand for labor amid the re-opening of the economy in 2021 has been paired with stubbornly low labor force participation rates. The anecdotes about many baby boomers retiring are substantiated in the data, as participation rates for the 55+ crowd remain low but improved community health and rising wages will entice some folks back to work. Job growth should exceed 3% this year. Over the long term, the U.S. labor market, along with other OECD countries, must contend with a shrinking working-age population.