BREAKING NEWS — MARKET SPECULATION & THE STATE OF THE ECONOMY
DATE: February 1, 2022 | BY: Dr. Edmond J. Seifried, PhD, SB Value Partners Chief Economist | TOPIC: The Big Question...So What's Next?
- The Federal Reserve abandoned its transitory inflation stance and is considering changes in monetary policy to address the current pressing economic environment.
- The housing market is trending upwards with growth in housing starts at 1.7 million and building permits at 1.87 million.
- GDP jumped to 6.9% in Q4, primarily due to an investment in inventory.
- Personal savings decreased to $1.3 trillion in Q4 compared to $1.6 trillion in Q3. The personal saving rate (personal saving as a percentage of disposable personal income) dropped to +7.4% in Q4, relative to +8.9% in Q3.
- The unemployment rates for December ’21 came in at 3.9%, a drop from November’s 4.2%.
- Major results from the FOMC meeting on January 25-26 included the unanimous decision to cease bond purchasing by March 2022.
A SHIFT IN MONETARY POLICY DURING A PERIOD OF LINGERING INFLATION
With a 7% inflation rate at year-end 2021, any hopes of a transitory inflationary period have quickly faded. As such, The Federal Reserve is positioned to increase interest rates. Note the following:
- Rates may increase as early as March 2022.
- Some FOMC members are suggesting up to four rate hikes throughout the year.
- While the FOMC is committed to a ‘no surprise’ environment, some members are raising the possibility of a ½% rate hike at the March 2022 meeting.
Does this mean that unemployment rates have recovered? No, not entirely. While the Federal Reserve has historically deferred increasing rates until both the GDP and unemployment rates have recovered from a recession, lingering inflation rates may prove to be the catalyst for changing interest rates.
December employment statistics were as follows:
- The unemployment rate dropped to 3.9% in December ‘21, .6% above the pre-pandemic level of 3.3%.
- New jobs created in December were 199,000, down from 249,000 in November.
- The labor force participation was 61.9%, unchanged from the prior month.
- Quit rates are at record highs, especially in the areas of food services and travel accommodations.
As the Federal Reserve transitions from quantitative easing to quantitative tightening, note the following:
- The FOMC agreed to cease bond buying by a target of March ‘22.
- Balance sheet reduction of securities will occur through maturities rather than the sale of securities.
- In the long run, the Federal Reserve intends to primarily hold Treasury securities.
- Board member Waller believes that returning to pre-pandemic levels of $4.2 trillion or 20% of GDP is a “reasonable benchmark.”
- Currently, the Fed’s balance sheet sits at $8.86 trillion, or approximately 35% of GDP.
DR. ED’S FINAL THOUGHTS
My advice for high-performance financial institutions…
- 1Take advantage of SB Value’s free portfolio analysis. Do you know how much you are paying in hidden mark-ups? It costs nothing to find out. The costs of not knowing could be substantial…
- 2Scrutinize the costs and services of your business partners, even long-time, trusted partners. It’s a brutal fact that operating in a business as usual manner could put your financial institution at risk.
- 3Every penny counts — review every line item for lower cost alternatives.
- 4Become the best ALCO managers possible — use the entire balance sheet wisely to grow earnings.
ABOUT THE AUTHOR
Dr. Edmond J. Seifried, PhD | Chief Economist
Dr. Seifried is Professor Emeritus of Economics and Business at Lafayette College in Easton, Pennsylvania. He also serves as the Chief Economist for SB Value Partners, L.P., and Executive Consultant for the Sheshunoff CEO Affiliation Programs.
Dr. Seifried serves as the dean of the Virginia and West Virginia Banking Schools and has served on the faculty of numerous banking schools including: Stonier Graduate School of Banking, and the Graduate School of Banking of the South.
Serving community financial institutions for 30 years.
Providing portfolio advisory services to approximately $2.3 Billion of community bank and credit union investment portfolios.
Actively managing over $477 Million for community financial institutions and their customers in managed accounts and 3(C)(1) L.P.’s.
SEC NUMBER 801-66139.
William Barnes | VP - Business Development