The Economy: What We’ve Learned

I take five key lessons from 2021. First, COVID-19 still impacts our growth, but it has largely become a supply side and inflationary challenge. Second, government support helped bridge our economy through the initial shock, but we may also be seeing other effects. Third, our supply chains were too lean to support the wide swings in demand. Fourth, power has shifted to labor as demand has exceeded supply. Finally, the word transitory did not serve its intended purpose, as inflation has lasted longer than many expected. These lessons help shape my outlook for 2022. While there are many unknowns ahead, I expect increases in household balance sheets to sustain demand for quite some time. It may take a year or longer to get to the other side of supply chain pressures, but they will eventually catch up. Labor will remain short. Prices will cause consumers to adjust as savings erode, and wages will bring people off the sidelines. But what will happen to the path for inflation? I am closely watching the prices for goods versus services. Will they continue on their historic paths or will present adjustments persist? How these two sectors net out will matter as the Fed continues to work to meet its stable price mandate. In terms of policy, we have started the process of normalization, but the timing and pace of any future rate moves will depend on the answer to my question on inflation.