Higher Interest Rates Loom

This past week the Fed announced its plans for seven rate hikes in 2022, starting with a 25 bps increase in March ‘22, taking the fed funds rate up to nearly 1.9% by year-end. Compared to a 50 bps initial hike, on the table earlier this year, the 25 bps baby steps reflects the Fed’s tough position of needing to address spiraling inflation while remaining somewhat accommodative during the most uncertain days of the Russian-Ukraine crisis.

It’s clear the Fed can no longer ignore inflation. The “transitory” descriptor has since been pulled from Fed communication. The Russian invasion now puts even more pressure on inflation with anticipated rising food prices and continued high gas prices.

Bond markets and the Fed seem to be in agreement on the path forward. The 10-year stands at 2.15%, up from 1.5% at 2021 year-end so the bond selloff will have an effect on a variety of debt funding instruments like mortgage rates and variable commercial note. It’s clear from the short and long ends of the yield curve that inflation is enemy #1 at the cost of all else.

The Fed’s tightrope walk will be combating a generational inflation spike while trying to keep a post-COVID economy from sputtering too quickly as a result of its actions. For a soft landing, the feat seems nearly impossible, akin to landing a jumbo jet on a moving aircraft carrier changing course by the second. The focus will be on volatility, asset prices, cap rates, how far and fast lenders follow suit with rates and what the Fed might do in the event markets blow up at the signs of tighter financial conditions. 2022 just got a whole lot more interesting in the past two months, and a string of dramatic market events is only likely just getting started.