Balancing Act

Question: What data will the Federal Open Market Committee (FOMC) look at prior to their meetings on March 15 and 16th? 

Answer: Economic data released between now and the March Fed meeting will steer the Fed’s forecasts and policy adjustments. Other items influencing the conversation and FOMC actions are whether supply chain issues ease, how the future of Omicron influences employment numbers, and the extent to which higher gas prices and overall inflation impact the economic outlook. 

The Consumer Price Index (CPI) numbers for January and February will be available prior to the Fed’s March meeting. This will provide guidance for inflation interest rates. In addition, gas prices, supply chain disruptions and staffing shortages will also shape the conversation. 

Institute for Supply Management (ISM) Manufacturing Index numbers show that backlogs are down in five of the last six months, new orders fell for the second straight month, and delivery times declined for a third consecutive month. This suggests that inflation pressures in some areas may be starting to ease. As an example, General Motors expects “ongoing semiconductor improvements throughout 2022” and new car prices saw their first decline in ten months. Time will tell if there are noticeable supply chain improvements allowing the Fed to be more patient in tightening monetary policy. 

Job creation should remain healthy if COVID-19 cases recede. The percentage of businesses planning to increase employment is near the highest on record. The one-two-punch of stimulus money reserves being depleted and higher prices for gas and food will cause people to go back to work sooner than later. If we see a stronger labor market, the Fed will be apt to focus more on inflation. 

The mega-cap tech-oriented companies reported earnings so now we wait for results from large retailers. Technology company earnings encouraged recent market volatility and retailer results will be even more critical. Earnings for 2022 have been revised up slightly since the start of earnings season, and any additional boost would reinforce the expectation of ~15% earnings growth this year. 

Resilient demand is reason to believe that our economic momentum will continue, but that can bring more inflation. While Omicron poses downside risk to Raymond James’ initial 3.5% economic growth forecast for 2022, the base case remains that growth will rebound once we move past this current case surge, and that there is still a very low probability of a recession on the horizon. As a reminder, GDP rose 6.9% in the fourth quarter of 2021 after an increase of 2.3% in the third quarter. GDP is a measurement by the U.S. Bureau of Economic Analysis that measures the market value of all final goods and services produced in a specific period. 

The surge in oil prices must be monitored as it could negatively impact consumer spending. Despite oil rallying to $90+ per barrel, gasoline prices have remained fairly contained at $3.42. If gas prices spike closer to $4 per gallon, it will pose a risk to economic forecasts as it dampens consumer spending power. Money spent filing the car is money not spent elsewhere. 

January payrolls surprised to the upside with an increase of 467,000 showing a stronger trend for job growth. We don’t make too much of a single report, but the data suggests that there is a possibility of a 50-basis point rate hike at the mid-March FOMC meeting. A tight labor market, job growth and rising wage pressures is good for workers. Yet, with demand for goods and services outpacing supply, higher prices eat away at purchasing power meaning the Fed may have a more painful adjustments to make if it doesn’t act to keep inflation in check. 

Federal Reserve Chairman Jerome Powell’s latest commentary was part of the push for the dramatic increase in market volatility. As we move beyond earnings season to the uncertainty surrounding inflation, growth, and the path of monetary policy, it’s likely that the stock market will be choppy between now and the Fed’s March meeting. One benefit is knowing that historically slower growth and a tightening cycle isn’t the same as a halt in economic growth. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of February 6, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time. All investments are subject to risk, including loss. Diversification does not ensure a profit or protect against a loss in a declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. Material is provided for informational purposes. Consult your tax professional and financial advisor before making any investment decisions. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. 

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