Inflation, global supply chain issues and of course COVID-19 were among the top economic headlines in 2021. The US economy nonetheless grew after the pandemic shutdowns of 2020. Find out what might be around 2022, Jim Levulis of WAMC spoke with Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors in Albany.
Johnson: Well I think the good news about 2022 is that it looks, to some extent, like a continuation of 2021. Now, there’s no doubt that there are headwinds that 2022 is going to bring. face, and not least of course, the Federal Reserve’s policy, as well as the fiscal policy emanating from Washington, is unlikely to be as useful in 2022 as it is in 2021. And that has to be taken into account, which to me. leads to the kind of conclusion that when we start 2022, that we are talking about an economy that will continue to develop, but that it will probably slow down compared to the pace we saw in 2021. So I think it’s going to be a positive year, a positive year of growth. We will see that show up in the employment figures. Although the jobs numbers like everything else will slow down to what we might call a more normal pace. So I think we are heading towards normality. And that’s not a bad deal, because it’s a good deal, especially if the economy continues to grow. But there are real challenges.
Levulis: A number of people have paid close attention to the last few months of 2021, inflation. The latest figures show inflation up 6.8% from this point last year. Now, in response to this steady rise in inflation that we’ve seen, the Federal Reserve is saying it will cut back on its monthly bond purchases, these were meant to lower long-term interest rates to double the rate. pace it had previously set and will likely end shopping in March. And then this timeline also puts the Fed on track to start raising rates as early as the first half of next year. With that in mind, what are your expectations for inflation in 2022?
Johnson: Well, that’s a great question mainly because we’re talking about a 2022 slowdown, in part because of the challenge from the Federal Reserve or the monetary policy. It’s pretty clear now that the Federal Reserve intends to cut back, which you mentioned, and that’s cutting back on its purchases of treasury bills and mortgage backed securities. The level of stimulus that this provides to the economy, then they plan to raise short-term interest rates when we get to around, say, May 2022. And that will present a bit of a headwind or a challenge for the markets. and the economy. And that’s one of the reasons I think the economy is definitely going to slow down. I’m a little surprised to be honest with you to some extent. There is no doubt that the inflation rate has been high, we see a lot of complaints, anecdotal complaints, people on the streets tell me they are paying higher prices, and you see that manifested in the rise of 6.8% inflation, consumer inflation, which we observed in the most recent month. So there is no doubt that inflation has been high. But that’s my expectation and quite frankly I think it’s the expectation of many Federal Reserve officials that this inflation rate will drop in 2022, that it will drop with or without the help of. the Federal Reserve in Washington. And what we’re talking about downside, some people are predicting a drop as low as 2.5%. I think that’s wishful thinking, but I think going down to 3.5%, from that 6.8% level is really probably in the cards. So I think inflation, with or without the Federal Reserve, will come down. So I’m a little surprised, not that they’re even reacting to 3.5% inflation, but they’re going to react so aggressively. There is no doubt that the Federal Reserve has not only said it is going to react or do something about its concerns about inflation in 2022, but that it will react aggressively. We often hear the word hawkish, they become more hawkish. And that’s pretty clear from what we heard from the Federal Reserve at its December meeting and December press conference it held right after the meeting. You know, I’m a little surprised at this and I think it’s quite frankly, probably not necessary. I happen to be criticizing this Federal Reserve right now because of this. And yet, it looks like they are going to react, it looks like they are going to lean towards restraint. And in my opinion, lean too much towards restraint, because I don’t think it is necessary.
Levulis: And when the Federal Reserve is made up, President Biden appoints Jerome Powell for a second term as Fed chairman. And while Democrats like Massachusetts Senator Elizabeth Warren say they will vote against Powell, the Senate is likely to confirm it. What is the impact of having Powell there for another term?
Johnson: You’re probably asking the wrong person for President Powell’s endorsement for another term. I happen to be very much in favor of having economists like Janet Yellen or Lael Brainard, who is also a member of the Fed, who will be vice-president. And she’s an economist and Janet Yellen is an economist. And of course, there is nothing against lawyers, I have nothing against lawyers. But I think President Powell is really not as qualified as some economists for this job. So I’m obviously going to be supportive, as supportive as possible as we move into 2022. But I think it’s always good to have a good economist working closely with him. And I certainly hope he works closely with Janet Yellen, of course, will be at the Treasury. And they’ll be spending time together, but as Brainard, but there are other economists who are on the Federal Open Market Committee, and I hope he really does spend time working with them, because really, the Economists add a tremendous amount of understanding to the pattern of economic events and financial markets, which sometimes non-economists do not quite fully understand. So I’m a big fan of some of the economists. I wish President Powell good luck as Chairman of the Federal Reserve. It is going to be very important in directing monetary policy. And my worry or concern is that they’ll get too aggressive, too hawkish, lean too much towards restraint, or raise interest rates too much in 2022. And that’s going to change the pattern of events or the outcome, mostly for the end. 2022 and 23.
Levulis: Now Hugh, we’ve been talking for the last couple of years or so about the unpredictability of COVID-19 and the corresponding impacts on the economy. There have been developments, like government restrictions, vaccines, the emergence of new variants. But in the last couple of years or so, from an economic perspective, have you been able to identify any trends that have occurred during this pandemic?
Johnson: I wish I could. In fact, the financial market and economic trends have been surprising for the most part when I say that it has been fairly normal. The markets have done well, the sectors of the market that are supposed to be doing well, and the economy is expanding or will continue to grow have done well. The economy continued to do well, with a few starts and stops the third quarter was not particularly impressive. We’ve seen consumer spending slow down a bit periodically along the way. But overall, everything was pretty normal. But the one thing that, of course, is completely unpredictable is not just COVID-19, but also the different variants of COVID-19 and what the impact will be on the economy. Right now we’re talking about, you know, omicron, the variant. And it’s very difficult to predict, quite frankly, what the price of this variant will be, and also what the impact on the economy will be. So that created uncertainty and made the whole 2022 forecast much more difficult.
Levulis: And finally Hugh, a change for 2022. You yourself will be stepping down as Chief Economist at Graypoint LLC. You will move on to a post of president emeritus, what are you thinking about now?
Johnson: Well, I’m going to play the role of president emeritus and that’s good. It’s a bit ceremonial. But nevertheless, I am very happy to have this title and this position. I’m also going to have a consulting firm that will probably be called Hugh Johnson Economics. I will continue to work with the folks at Graypoint to try to give them as much advice as possible on the outlook for the markets and the outlook for the economy, where things are heading. So in a sense the role isn’t really going to change. And when I look at 2022, yes, I would like to retire. Yes, I would like to go a little easier. But frankly it’s a very interesting time and obviously to stay involved, to continue to watch very carefully what’s going on and try to interpret it and help others understand what’s going on and what that is. means for their pips that they are building, it’s going to be on the way for me and I’m looking forward to it, and I’m keeping my fingers crossed and hoping we have a good 2022. I think we are heading for a good 2022 not as weak as 2021, but a good 2022. And I hope the Federal Reserve does not upset the basket of apples. I’m a little worried about this. And I’m obviously very worried about COVID-19, whatever the variant was at the time, and I hope that doesn’t upset the applecart. So a tough 2022, but a positive 2022 and I hope to be very involved in helping people along the way.
Hugh Johnson is President and Chief Investment Officer of Hugh Johnson Advisors in Albany. As a disclosure, Graypoint LLC is a holding company for Hugh Johnson Advisors. Graypoint has been a WAMC underwriter.