Inflation in America has hit levels that have not been seen in nearly four decades. Year-over-year CPI in December 2021 was at 7%, the largest increase since 1982. Supply chain issues and constraints have limited supply in a time where demand is skyrocketing as pandemic federal programs still usher in new investments into the economy. Companies are bracing for a federal funds rate hike by the federal reserve as early as March in order to reduce aggregate demand. Today, we are going to examine the schedule for 2022. as well as how rate-hike cycles affect the stock market.
The president of the Philadelphia Federal Reserve, Patrick Harker, believes that there will be as many as three seperate rate hikes throughout the year to fight inflation. However, Harker also opened up to the possibility of even more increases in 2022, as did the Chicago Fed President Charles Evans. Ultimately, the consensus among federal reserve leaders is either three or four rate hikes, alongside a shrinking of the reserve's $9 trillion balance sheet, which would be crucial to stabilizing the economy following weak monetary actions after the pandemic. Wall Street also projects at least three hikes, as a Goldman Sachs report predicts hikes in March, June, and September, with a possible additional hike in December. However, Jamie Dimon, the CEO of JP Morgan, proposed the possibility of up to seven hikes throughout the year. Although the exact number of hikes is uncertain, one outcome is true: we should see at least three rate hakes in 2022.
Although common knowledge of macroeconomics would point to market drops following rate increases, recent history has shown otherwise. We turn our heads to the market to see how this federal reserve policy will affect equities. According to MarketWatch research, the average return of the Dow Jones Industrial Average is 55%, while the return of the S&P 500 is about 63%.
However, a review of a few moments in greater history points to mixed results. The chart below shows the 1-month market performance following the announcement of rate hikes, which yield both positive and negative outcomes. Consequentially, the rate hikes should point to having a slightly positive or neutral effect on the aggregate market as a result of being priced in by traders expecting the hikes. However, value-heavy sectors, such as energy and financials, will seem to have better returns in this environment than this recent bull run.