Biggest risks of 2022: Surging inflation and an aggressive Fed - The Average Joe

    Biggest risks of 2022: Surging inflation and an aggressive Fed

    Victor Lei β€” Head of Research

    December 16, 2021

    top picks

    December 16, 2021

    The monetary policies that powered the stock market to record highs are ending β€” 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 β€” the Fed is removing the market’s life jacket.

    • In November: Fed officials said it would reduce bond purchases by $15B a month β€” 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” β€” 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 β€” 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 β€” 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%)

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