Fed speak
The most important news to hit the market was the Federal Reserve’s complete 180 in terms of policy. The central bank that had been waiting and waiting and waiting to change policy in the face of rising and rising and rising inflation decided to announce that they were not only putting on the brakes on their accommodative policy, but actively going to go the other way and tighten policy pretty aggressively next year.
Moral of the story: The bank has kept interest rates at effectively 0% and pumped trillions of dollars into the economy since the beginning of the pandemic. They’re basically going to stop pumping cash into the economy in the next few months and raise interest rates as many as three times next year (at 0.25% increments). Weirdly enough, the markets reacted positively to this news, likely because it was alluded to by Fed Chair Powell in the last month as he testified in front of Congress.
More ahead
This was somehow a surprisingly busy week in the markets despite being the week before Christmas. The big focus was on the central bank’s policy update but we got some data on the status of their dual mandate of price stability (aka inflation at 2%). Producer prices came in for the month of November and had increased 9.6% compared to the prior year. This is the highest level for this economic measure since November 2010.
Moral of the story: Producers eventually have to price these prices onto consumers, and we saw these producer prices increase before consumer prices started increasing meaningfully this year. Given producer prices are still increasing at a faster and faster clip, it only means more consumer price inflation is still ahead.
Still shopping
Retail sales increased 0.3% for November, but that’s slower than the rate at which prices increased for the month, so arguably retail sales were slightly lower if adjusted for inflation. Part of this was likely driven by people being worried about inventory levels running out closer to the holiday season because of the supply chain issues – and that brought people into stores for their holiday shopping earlier than usual this year. On an annual basis, retail sales increased 18.2%, well above the rise in prices at 6.8% for the same period and indicative of a strong consumer.
Moral of the story: Consumers are the backbone of our economy – as long as they keep spending, this economy keeps chugging along. Despite inflation claiming some of these gains in retail sales, consumers are still in a great financial position (household wealth increased in the last 5 quarters more than it has in the last 5 years before COVID!) and they’re ready to spend. It sets us up nicely going into the next year.