What will the Federal Reserve do in 2022, and how will those actions impact the economy? Those questions loom large for investors and the advisors that serve them.


In our January 27 War Room webinar, we explored the potential outcomes of the expected rate hikes of 2022. There’s talk that the Fed’s interventions will slow inflation and keep the economy on the right path. Some fear raising rates might plunge our already-fragile economy into a recession.


Here are the top five takeaways from our wide-ranging discussion on real-time economic indicators and historical market trends, all of which we believe present reasons for optimism about our current scenario.


1. The market is wobbly, but economic indicators are more stable than you may think.


The start of 2022 saw dramatic swings in the market, the likes of which we haven’t seen since October 2008. The Nasdaq had its worst January in history. These headlines sound dark, but it’s important to remember that the stock market is not the economy.


Broadening our view to other economic indicators paints a brighter picture. Unemployment remains low while labor force participation is on the upswing. Real GDP growth is strong, even trending above the long-term average.


2. The hawkish chatter doesn’t match up with reality.


Between the Fed’s meetings, countless pundits and analysts have talked about hawkish potential scenarios. Some have predicted eight rate increases in 2022, and others have said we’ll see the Fed go for a 50 basis point hike right out of the gate.


The words from Powell’s mouth, though, are much more measured. Yes, 2022 will bring rate hikes. But according to the Fed’s statement on January 26, none of these doomsday scenarios are in the cards. Powell indicated that the Fed will end net asset purchases in March and begin to reduce the balance sheet following the first rate hike, indicating a more slow and steady approach, rather than a drastic turn. Since then, several Fed presidents have similarly spoken in favor of a measured approach, and have expressed a distaste for the idea of a 50 bp+ rate hike.


3. The bond market remains strong.


The current differences between the equity and bond markets are like a tale of two cities. While the equity market is seeing wild ups and downs, the bond market hasn’t missed a beat. And that’s a good sign.



The bond market is where businesses and governments raise capital, and trouble in the credit market often signals a systemic issue in the economy. Today, though, it’s smooth sailing in the world of bonds. The volatility we see in equities isn’t usually indicative of a larger problem.


4. Rate hike cycles have historically had a positive impact on the market.


Don’t be fooled by the doom-and-gloom talk around inflation and rate hikes–historically, measured hikes have been good for the market.


If we look from the 1950s to today, almost all rate hike cycles have been followed by positive S&P returns. The sole exception is in the early 1970s, when the first oil shock throttled the market.



5. The good, baseline, and ugly.


While indicators seem generally positive at present, the levers affecting our economic situation are constantly in flux. That’s why we provide a look at the potential good, baseline, and ugly scenarios of any market event.


For the Fed’s 2022 plan, the good scenario has Powell successfully threading the needle. A measured approach to rate hikes keeps the stock market and the economy at large on the right trajectory.


Our baseline scenario has the hawkish talk tamping down potential growth. While we avoid a recession, the market remains in its head, and the economy flounders.


In an ugly scenario, we envision a policy misstep in which the Fed neglects to act on inflation in time. As inflation swells, the Fed attempts to overcorrect, and we head toward recession.


Of course, things can and will change. That’s why HiddenLevers is constantly updating its online scenario library to reflect the current economic moment. We’ll be adding to the Fed Roulette scenario on the HiddenLevers platform, so check in for the latest updates.


Learn how the dynamic fintech combination of HiddenLevers and ORION can help you better serve your clients.


Access to the services presented is provided solely as a service to financial advisors. HiddenLevers does not make recommendations or determine the suitability of any security or strategy. Past performance of a security or strategy does not guarantee future results. HiddenLevers research and tools are provided for informational purposes only. While the information is deemed reliable, HiddenLevers does not guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with respect to the results to be obtained from its use.