It has now been 19 months since COVID-19 was declared a national emergency in the United States. The media continues to paint the picture that there is no end in sight for the pandemic and forecasters are incorporating the longevity of the health crisis into economic projections. This is downshifting the market outlook. According to Oxford Economics, the newest forecast calls for a 2.7% growth in the gross domestic product (annualized) in Q3 2021. This percentage is off from the third quarters original outlook of 11.1% growth.
Half of the Federal Open Market Committee (FOMC) members expect a rate hike in 2022. There has been substantial progress on controlling inflation thus far; however, the key determinant to warrant a hike moving forward will be the labor market. The September jobs report fell short of expectations and decelerated from prior months, with 7.37 million still unemployed. However, there are fewer than 0.8 unemployed individuals for each current job opening, a historic low.
Inflation pricing is already evident in the market, reaching a 13-year high of 5.4%. The CPI for all urban consumers rose 0.4% in September. Continued disruptions in supply chains have pushed prices higher in transportation and warehousing, which rose by 2.8% in August, while food prices rose by 2.9%. The core index, which strips out food, energy, and trade services was more muted and grew 0.3%, the smallest increase since last November. Despite the slower growth rate, the PCE index reached a record high in August, rising by 8.3% over the year, with the core index rising by 6.3% over last August. Price increases are expected to reach consecutively higher record levels over the next few months.
Tapering (shrinking the balance sheet and decreasing bond purchases) may soon be warranted. In a recent meeting, the Fed stopped short of confirming the November 3rd meeting as the start date for shrinking the balance sheet. The test for rate hikes is far more stringent than the test for tapering. The year-end Federal Funds Effective Rate is expected to average .3% in 2022 and 1.0% in 2023. In conclusion, the outlook for the market is more hawkish than expected. Rate hikes were disproportionate, but tapering could soon begin in November and job market performance will help confirm expectations for the outlook.