The ESG Group believes that the principal macroeconomic concern for 2022 remains accelerating inflation – and how the market and policymakers respond to it.
While there's significant room for uncertainty regarding the near-term path of inflation, the ESR Group projects it to peak at approximately 7% annualized in the first quarter of 2022 before gradually decelerating to 3.8% by year-end, according to the report.
The ESR Group expects the Federal Reserve to begin a more aggressive pace of monetary tightening in the new year as part of its effort to combat rising price pressures without tipping the economy into recession. The forecast is now calling for interest rate increases in the second and fourth quarters of 2022, and then quarterly through 2023. The market forwards showed a high probability of a third increase in 2022 at the time of writing.
“While the economy picked up steam late in the year, unfortunately, so did inflation, and the market expects the Fed to recalibrate its monetary policy as a result,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
“The public registered its ill-will toward inflation in our most recent National Housing Survey, which found that 70 percent of consumers believe the economy to be on the wrong track – the most since 2011, when consumer sentiment was weighed down by the aftermath of the Great Recession. The Fed recently acknowledged that inflation is unlikely to be transitory, and it will now attempt to engineer a soft landing, one in which inflation moderates to acceptable levels and economic growth decelerates but doesn't contract. Whether the Fed is able to thread this historically difficult policy needle is shaping up to be one of the most consequential economic storylines of 2022.”
The group revised its full-year 2021 economic growth projection to 5.5%, up 0.7% from Nov. 2021's projection. The adjustment was made due to stronger-than-anticipated consumer spending and inventory investment data, according to the report.
In terms of home sales growth projection for 2021, the ESR Group upgraded its projection to 7.1% due to a strong end-of-year sales surge, according to the report. Meanwhile, the group projects a 1.4% decline in home sales growth for 2022, due to limited listings and growing affordability constraints.
The group also expects mortgage rates to drift upward, averaging 3.2% in 2022, due to additional home price appreciation weighing heavily on affordability.
