A Path-Dependent Year—WWJD?

Twenty-two years of tradition dictate I begin the new year by forecasting what lies ahead. Unfortunately, the future is never really knowable. “Forecast” is a polite synonym for “guess.” The better ones are informed guesses, but still inherently uncertain.

The coming year is particularly uncertain. The economy could be wildly different based on how certain events unfold. To use a favorite central banker term, it is “path dependent.” The path we take will depend largely on the decisions of people (and a virus which again depends on the decisions of people) in key positions.

Some evangelical Christian groups wear cryptic little “WWJD?” pins. It stands for “What Would Jesus Do?” That’s a good question to ask when you face a moral dilemma. The economic dilemma, while different, becomes clearer when we ask what certain mortals will do. That will be our framework as we consider what 2022 will bring.

In this Part One of our 2022 forecast, we consider three decision-makers you know… but it’s not entirely clear whose decisions will matter most.

An Especially Difficult Challenge

“WWJD” is our first question for 2022. In this context, it means “What Will Jerome/Jay Do?”

Jerome Powell and the Federal Open Market Committee he leads have no good alternatives. Choices their predecessors made years (and decades) ago limit what they can do now. Choices they made last year certainly have an impact. Powell and the FOMC must choose, and their constrained choices will constrain the economy in 2022.

The main challenge is inflation. Going into 2021, the Fed expected higher inflation but thought it would be “transitory.” To be fair, I and many others initially thought the same, but by early summer I was asking for a refund on my “Team Transitory” T-shirt. Inflation rose more and lasted longer than we expected for two primary reasons.