It’s the time of year when we try to read the tea leaves to see what the next year holds.  I have a terrible joke about Einstein talking to a banker in heaven about where interest rates will go – but I will spare you.  Suffice it to say, predicting where the economy may go is a fool’s errand.  So, not sure what that says about me writing this letter, but here we go!

Interest Rates.  The consensus is that the Fed may raise rates by .25% as much as three times in 2022.  That’s a total of .75%+ by this time next year!  We haven’t seen a change like that in a long time – and I’m suspecting that we won’t this year either.  I think the Fed in its last meeting wanted to sound tough on inflation (raising the rates would slow the economy down and theoretically lower inflation) but, and this is just a total guess so don’t place any money on it, I don’t think they will go that far.  But rates will rise, they have to.  Which means we’re going to do better on our savings – but will pay more on our borrowed funds.  Because consumer savings numbers are still high though, I’m willing to predict that lending rates will rise faster than savings rates.  So, even though this may seem like self-serving advice coming from me, I would still recommend that if you think you need to borrow money this year, consider doing it as early in the year as possible before rates start to rise.  In particular, home equity might be a good thing to leverage early on in the year – values are high, and rates are still low.  

Auto Inventories.  Nothing has been more frustrating than what has been going on with autos, where inflation has been particularly nasty.  A combination of high demand and the parts supply issue has driven prices way up, even on used vehicles.  I think this issue will subside as the year goes along – supply chain issues will get resolved and the inventory will start flowing more smoothly, hopefully by the spring and summer time, when buying traditionally reaches its peak.  I would not expect prices to come down – but the rate of price increases should slow.

Housing.  Prices should stabilize.  “Should” – but the housing market is very sensitive to other economic and political factors.  In an odd twist, rising interest rates may help potential buyers by slowing the demand.  That being said, I wouldn’t imagine that we approach anything approaching “normal” until 2023.

The Covid Wildcard.  Everything I said above could all get thrown out the window depending upon what happens with the pandemic and our reaction as a society to it.  My assumptions are based upon a gradual decrease of the severity of the virus and the restrictions necessary to contain it.  If we go the other way (I’m knocking on wood as I write this) and things get worse on the pandemic front, all bets are off.  I’m truly hoping, as I’m pretty sure all of you are, that we don’t have to consider those alternative scenarios in 2022.  It’s time for this Black Swan to fly away.  Ok, so I did get in one terrible banker joke.