The ‘New Fed’ and the Outlook for 2022

The Fed meets next week for the first time in 2022, a year that will be the most challenging one for the Fed in generations.

Today’s post—after a brief introduction—is for paid subscribers only. I will be writing more deep-dive pieces on the Fed this year, largely behind the paywall. Subscribe here.

Main Takeaways

• With unemployment below 4%, the Fed will soon agree we are at maximum employment, that is, the lowest sustainable level before pushing up inflation.

• The Fed will continue to remove its support to demand: end of asset purchases, modest increases in the federal funds rate, and the start of a reduction in the balance sheet.

• Incoming data—on the pandemic, jobs, and inflation—will drive the timing and degree to which the Fed removes its support to demand this year.

• Biden’s nominations for the Board—Jay Powell, Lael Brainard, Sarah Bloom-Raskin, Lisa Cook, and Philip Jefferson—along with current members, Michelle Bowman and Chris Waller will be an excellent, sum-is-greater-than-the-parts team to lead the Fed.