Biggest risks of 2022: Surging inflation and an aggressive Fed

The monetary policies that powered the stock market to record highs are ending — sooner than expected.

What’s the big deal? During COVID, the Fed bought billions in bonds to stabilize the market. Having achieved their goal and the economy returning to normal — the Fed is removing the market’s life jacket.

• In November: Fed officials said it would reduce bond purchases by $15B a month — until stopping all purchases.
• Yesterday: the Fed said it would accelerate the pace of those reductions to $30B a month.

Shifting gears: For months, Fed officials stuck to their guns that inflation would be “transitory” — lasting only a short period. With inflation hitting 6.8% in recent months, the Fed may be realizing inflation will last longer than expected.

• In September, only half the Fed members expected interest rate increases in 2022.
• Now, every single one expects increasing interest rates in 2022.

If the Fed doesn’t reduce bond purchases or raise interest rates — it could run out of ammunition during the next recession.

Why this matters: Rising rates have big implications for stocks. With the accelerated timeline, the purchases are expected to end in March — instead of July.

Fund managers see surging inflation and aggressive Fed moves as 2022’s biggest risk. Here are the top 2022 themes of 106 asset managers (via Bloomberg):

• Value stocks (23.6%)
• Green energy/sustainability (13.2%)
• Small-cap stocks (11.3%)
• Growth stocks (10.4%)