Fed will be tested again in 2022 to keep economy rolling in midterm election year. Interest rate hike coming?

This column usually spotlights a key economic report or influential event in the week ahead that could influence investment markets. As the third calendar year of the COVID-19 pandemic approaches, let’s look beyond the sun setting on this week and 2021.

The credibility of the lender of last resort will be put to the test in 2022.

There is no argument the Federal Reserve saved the American economy from a deep and devastating depression. It rewrote its playbook in real time during the spring of 2020, as emergency public health restrictions were put in place and consumers simply stopped spending out of fear of COVID-19. The mere act of action staunched the economic terror gripping the financial markets and gave confidence to investors.

The central bank already has had to change its tactics in response to its misread of the stability of prices, one of its two mandates. For months, the Fed saw high inflation as transitory. Once it became clear inflationary pressures brought on by the pandemic were not easing, the bank accelerated ending its U.S. bond-buying strategy. After winding down that program in March, the bank’s next action option will be to raise its target short-term interest rate.

In 2022, the Fed’s commitment to fight inflation with higher borrowing costs will be tested. Market odds are 50-50 the Fed will hike its rate as early as March, according to the CME FedWatch Tool which calculates probabilities based upon the interest-rate futures market. While those market odds can change quickly, the bank is dedicated to maintaining its reputation and reliability for steady and deliberative action.

In the weeks ahead, that dedication will be pressured by the omicron variant of the coronavirus. There is no appetite for 2020-like economic shutdowns, and perhaps there is no need. Vaccines have proved very effective at reducing the severity of the pandemic disease. Still, this latest mutation will muffle some economic activity, threatening to slow the second of the Fed’s mandates — full employment.

The tricky balance for the central bank in 2022 is further complicated by politics. The year ahead is a midterm election year with the balance of power on Capitol Hill at stake. Rising borrowing costs for consumers, businesses and homebuyers are not politically palatable for those seeking reelection. Yet they may be necessary to help blunt the macroeconomic effects of pandemic stimulus by the Fed and spending by Congress.

In the year ahead, the Fed’s reputation for independence and integrity will be pressured by economic crosswinds and politics.

Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView