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Bye Bye 2022

Economic and market conditions were very challenging in 2022. Surging inflation and aggressive monetary tightening by the Federal Reserve Bank (FED) dominated the year. As a result, both stocks and bonds suffered substantial losses. Stocks were down 14.8%, and bonds were down 12.8%. The last time this happened was 45 years ago.

Consumer goods, food, and energy prices increased significantly during the pandemic due to supply chain issues. Initially, the Fed believed inflation was transitory and decided to leave interest rates low so all parts of the economy could recover fully. However, on February 28, 2022, Russia invaded Ukraine. These countries are crucial in the world's energy, fertilizer, and grain supply. Removing these, caused a supply shock, and prices surged. The resulting inflation started seeping into the labor market while the unemployment rate was less than ~3.5%. The limited supply of labor paired with an increase in demand for labor is a recipe for wage inflation. Employees were in the driver's seat and could negotiate better pay packages. In March 2022, the Fed recognized they needed to fix this problem at all costs. Therefore, they started aggressively increasing interest rates to slow the economy. I think putting the US economy into a recession may be the only way to reduce inflation to the Fed’s goal of 2%.

Fed Funds Futures

We can use the Federal Funds Futures contract to estimate where the titans of wall street think rates are heading. This metric shows that Wallstreet predicts the Fed to pivot and start reducing rates in the latter half of 2023. However, the Fed has been very transparent that it wants to verify inflation is dead before shifting its stance on rates. Fed Chairman Jerome Powell said, “Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.” In the 1970s, the federal reserve pivoted on rates too early, and inflation returned with a vengeance. Powell is probably willing to keep higher rates for longer to ensure inflation is dead.

Bank Savings

The St. Louis Federal Reserve Bank has a lot of great resources on its website. The cash assets held in the banks' chart is probably one of my favorites (below). You can see a massive spike in saving account balances starting during the pandemic and peaking in ~September 2021 to ~$4 trillion. Consumers have spent down the cash hoard to about ~$3.1 trillion since then. I assume the pandemic has caused many people to prioritize savings; however, we probably have another trillion to spend, making taming inflation more difficult.


Markets have been resilient at the start of the year. However, economic data have pointed to further weakening in the economy. Overall core retail sales fell sharply in December, and while poor weather conditions may be partly to blame, the data suggest consumers were much more reserved in their spending during the holiday season.

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