Amid inflation and market turmoil, here’s what went wrong (and right) this year.

Markets look set to close the year the way they spent most of it: volatile, fixated on central banks and worried about a recession.

Even though the data released this week more or less confirmed that inflation in the United States is past the peak, Fed Chair Jerome Powell and the rest of the Federal Open Market Committee stuck to the inflation-fighting script at their December meeting.

“We will stay the course,” Powell said, “until the job is done.”

At the European Central Bank (ECB) meeting on Thursday, President Christine Lagarde was even more forceful. Her comments strongly suggest that the ECB intends to raise rates aggressively through next spring despite the clear risks to economic growth in the region.

It seems like the central bank script hasn’t changed because there does still seem to be an imbalance in the labor market, and average hourly earnings are rising at a pace that isn’t consistent with 2% price inflation.


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But the latest U.S. Consumer Price Index (CPI) data show a shrinking number of upside inflation drivers, especially when you consider that the official shelter price data are likely lagging actual conditions by a significant degree.

When inflation is high and sticky, strong talk from central bankers gets taken seriously by markets. But when interest rates are already slowing down growth, and actual inflation is running at a pace that is consistent with targets, markets can start to sniff out the end of the tightening cycle.

Inflation impulses getting harder to find

The bond market, for example, doesn’t seem to believe that the Federal Reserve will raise rates to over 5% like they say they will. Two-year bond yields are below the Federal Funds rate. Historically, that is a sign that investors think hiking cycles are over. The hawkish talk didn’t move longer-term rates either. 10-year bond yields are at their lowest level since September.

Even though stock markets had a shaky end to the week, they are still well above the lows from October.

In our outlook, we argued that the real economy will have to deal with the consequences of 2022’s rate hiking cycle, but markets are likely to find their footing. Despite the equity market volatility, the broad reaction to this week’s central bank meetings seem to support that view.

Spotlight: 2022 in Review

In our last note of the year, we wanted to take a look back on the year that was: challenges, tragedies, bright spots and all. So long 2022, we will see you in 2023!

Key Events from 2022; S and P 500 index level
Originally published by J.P. Morgan

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