Inflation, global supply chain issues and of course COVID-19 were among the top economic headlines in 2021. Still the U.S. economy expanded following the pandemic shutdowns of 2020. To learn what might be on the horizon for 2022, WAMC's Jim Levulis 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 like, to some extent, a continuation of 2021. Now, there's no question that there's some headwinds that 2022 is going to face, not the least of which of course, is Federal Reserve policy, as well as fiscal policy coming out of Washington, is probably not going to be as helpful in 2022 as to 2021. And that needs to be taken into account, which leads me with the sort of conclusion that as we start 2022, that we're talking about an economy which is going to continue to expand, but that it's likely to slow down from the pace that we saw in 2021. So I think it's going to be a positive year, positive year of growth. We're going to see that show up in the employment numbers. Although the employment numbers like everything else are going to slow down to what we might call somewhat of a more normal pace. So I think we're headed towards normalcy. And that's not a bad deal, because that's a good deal, especially if the economy continues to expand. But there are some real challenges.
Levulis: One number of people have been paying particular attention to these last few months of 2021, inflation. The latest figures show inflation up 6.8% from this point last year. Now, in response to that steady rise of inflation that we've seen, the Federal Reserve says it will reduce its monthly bond purchases, those were intended to lower the long-term interest rates at twice the pace it had previously set and will likely end the purchases in March. And then that timetable also puts the Fed on the path to start raising rates as early as the first half of next year. With that in mind, what's your expectation for inflation in 2022?
Johnson: Well, that's a great question primarily because we talk about 2022 going to slow down, in part because the challenge of Federal Reserve or monetary policy. It's fairly clear now that the Federal Reserve is intent on obviously tapering, which you mentioned, and that is reducing their purchases of treasuries and mortgage backed securities. The level of stimulus that that provides to the economy, and then they are looking towards raising short-term interest rates when we get to about, say May of 2022. And that will present a little bit of a headwind or a challenge for the markets and the economy. And that is one of the reasons why I think the economy is going to certainly slow. I'm a little bit surprised to be honest with you, to some extent. There's no question that the rate of inflation has been high, we see lots of complaints, anecdotal complaints, people in the street are telling me that they're paying higher prices, and you see that show up in the 6.8% rise in inflation, consumer inflation, that we've seen in the most recent month. So there's no question that inflation has been high. But it's my expectation and quite frankly, I think it's the expectation of many officials at the Federal Reserve, that that rate of inflation is going to come down into 2022, that it’s going to come down with or without help from the Federal Reserve in Washington. And what we're talking about coming down, some people are forecasting is to come down as low as 2.5%. I think that's wishful thinking, but I think come 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 is going to come down. So I'm a little bit surprised, not that they're going to respond to even the 3.5% inflation, but they're going to respond so aggressively. There's no question the Federal Reserve has not only said they're going to respond or going to do something about their concerns about inflation in 2022, but they're gonna respond aggressively. We often hear the word hawkish, they become more hawkish. And that's fairly clear from what we heard from the Federal Reserve in their December meeting and their December press conference that they held right after the meeting. You know, I'm a little bit surprised at that and I think that's quite frankly, probably not called for. I happen to be critical of this Federal Reserve right now because of this. And nevertheless, it looks like they're gonna respond, it looks like they're gonna lean towards restraint. And in my judgment, lean too hard towards restraint, because I don't think it's called for.
Levulis: And to the makeup of the Federal Reserve, President Biden is nominating Jerome Powell for a second term as Fed chair. And although Democrats such as Massachusetts Senator Elizabeth Warren say they will vote against Powell it's likely that the Senate will confirm him. What's the impact of having Powell there for another term?
Johnson: You're probably asking the wrong person about an endorsement for Chairman Powell for another term. I happen to be very biased towards having economists such as Janet Yellen or Lael Brainard, who is also a member of the Fed, who is going to be vice chairman. And she's an economist and Janet Yellen is an economist. And of course, there's nothing against lawyers, I have nothing against lawyers. But I think Chairman Powell is really not as qualified as some economists for that job. So I'm going to be obviously supportive, as supportive as I can as we move through 2022. But I think that it's always good to have a good economist working closely with him. And I'm certainly hopeful that he works closely with well, Janet Yellen, of course, will be over at the Treasury. And they’ll be spending time together, but as Brainard, but there are other economists that are on the Federal Open Market Committee, and I hope he really spends time working with them, because really, economists add an awful lot of understanding to the configuration of economic and financial market events, that sometimes people that are not economists don't really quite completely understand. So I'm a big fan of some of the economists. I’m wishing Chairman Powell the best of luck as Chairman of the Federal Reserve. He's going to be very important to leading monetary policy. And my worry or concern is that they'll become too aggressive, too hawkish, lean towards restraint too hard, or raise interest rates too much in 2022. And that's going to change the configuration events or the outcome, primarily for late 2022 and 23.
Levulis: Now Hugh we've talked in these past roughly two years about the unpredictability of COVID-19 and the corresponding impacts on the economy. There have been developments, like the government restrictions, the vaccines, the emergence of new variants. But over these past roughly two years, from an economic standpoint, have you been able to identify any sort of trends that have occurred during this pandemic?
Johnson: I wish I could. This actually, the financial market and economic trends have been surprising to most when I say this has been fairly normal. The markets have done well, the sectors of the market that are supposed to do well, and the economy is expanding or is going to continue to expand have done well. The economy has continued to do well, with some starts and stops, the third quarter wasn't particularly impressive. We’ve seen consumer spending slowed down a little bit periodically along the way. But generally speaking, everything has been fairly normal. But the one thing that, of course, is just completely unpredictable, is not only the COVID-19, but also the various variants of COVID-19 and what's gonna be the impact on the economy. Right now we're talking about, you know, omicron, the variant. And it's very hard to predict, quite frankly, what's going to be the course of this variant, and also what's going to be the impact on the economy. So it's created uncertainty and made the whole business of forecasting 2022, much more difficult.
Levulis: And finally Hugh a change for 2022. You yourself are going to be stepping down as chief economist with Graypoint LLC. You will transition into a role as chairman emeritus, what are you reflecting on at this time?
Johnson: Well, I'm going to be in a role of Chairman Emeritus and that's nice. That's somewhat ceremonial. But nevertheless, I'm very pleased for having that title and position. I'm also going to be having a consulting firm probably going to be naming as Hugh Johnson Economics. I'll be continuing to work with the people at Graypoint to try to give them as much advice as I can on prospects for the markets and prospects for the economy, where things are headed. So in some sense, the role is not going to really change. And when I look at 2022, yeah, I'd like to step down. Yeah, I'd like to take it a little bit easier. But quite frankly, this is a very interesting time and obviously staying involved, continuing to look very hard at what's going on and trying to interpret it and help other people understand what's going on and what it means for their nest eggs that they're building, it's going to be ongoing for me and I look forward to it, and I cross my fingers and hope that we have a good 2022. I think we're headed towards a good 2022 not as not as not as strong as 2021, but a good 2022. And hopefully the Federal Reserve doesn't upset the applecart. I'm worried a little bit about that. And I'm very worried obviously about COVID-19, whatever the variant might be at the time, and hopefully that will not upset the applecart. So a challenging 2022, but a positive 2022 and I hope to be very much involved in helping people along the way.
Hugh Johnson is the chairman and chief investment officer of Hugh Johnson Advisors in Albany. By way of disclosure, Graypoint LLC is a holding company for Hugh Johnson Advisors. Graypoint has been a WAMC underwriter.
