The 2022 Nonprofit Outlook for Inflation, Monetary Policy and More

I’ll never forget Oct. 19, 1987. Standing in the terminal at LaGuardia Airport, I watched a TV news broadcast of frantic traders and normally reserved commentators grasping for explanations of the sudden downturn. The Dow Jones Industrial Average dropped 508 points on Black Monday, a 22.6% loss.

That’s not where we are now. This memory is offered just as context for this year’s financial picture, which I regard as an opportunity for cautious optimism rather than fear or hesitation. As a former Goldman Sachs investment banker and co-founder of a firm that has served nonprofits for 30 years, I want to offer a few observations (not predictions or recommendations) on the present moment.

Inflation

We are seeing the highest level of inflation in decades, but, just as we’re not in 1987 anymore, we’re also not in 1974, when inflation topped 11%. Economists and commentators have offered conflicting explanations, but the intersection of the global pandemic, a persistently strong economy and aging infrastructure impacting supply issues constitutes a leading theory. This is cause for concern, but the recent federal infrastructure package as well as the diminishing COVID-19 numbers might help — along with belated intervention from the Federal Reserve System. Nonprofits could experience price increases in the short term, but I expect that factors other than inflation, such as the Great Resignation and the price of replacing staff, will be a bigger drag on budgets.

Interest Rates

All eyes are on the Federal Reserve Bank, the regulator responsible for managing U.S. interest rates. The focus of the Fed is currently twofold: controlling U.S. inflation and maximizing U.S. employment. Among the available monetary tools for accomplishing these goals, the most powerful are buying bonds (injecting liquidity) and managing interest rates. The Fed has been very clear that it will raise interest rates soon, and multiple times in 2022, a move that is targeted at tamping down inflation. As borrowing becomes more expensive, nonprofits with plans for growth will find that financing doesn’t come as easily as it has since the Great Recession and will surely be more expensive.

Portfolio Diversification

The low interest rates of the past dozen years are an anomaly, and they have pushed investors into vehicles other than bonds to improve the performance of their portfolios. Art, real estate, and cryptocurrencies have all gained momentum. All of these asset classes can be donated, but not all nonprofits are equipped to handle such gifts. At the same time, influential investors are aligning their portfolios around values as expressed through Environment, Social and Governance (ESG) that go beyond profit, and this shift presents a chance to connect with donors about your mission.

Stock Market Fluctuations

Nonprofit leaders who can develop an investment mentality are better equipped to form productive relationships with high-net-worth donors. Factors such as inflation and interest rates will inevitably affect the markets, but it’s important to understand that predictable events are already baked into stock prices. While we’re experiencing a period of considerable uncertainty, nonprofits may be able to seize on the volatility by reminding supporters that donating long-term appreciated stock to a charity may enable them to take a tax deduction and potentially eliminate tax consequences. And for older donors, contributing their appreciated IRA assets can be very advantageous. 

Endowments and Reserve Funds

All of these factors have consequences for charitable foundations and for nonprofits with reserve funds. Even with their comparatively conservative portfolios, new realities could drive shifts in investment strategies. However, there are more macro trends to consider beyond headlines about interest rates and inflation. Following the example of the Ford Foundation, which borrowed money to increase grantmaking during the pandemic, and the F.B. Heron Foundation, which has pioneered mission-driven investments, foundations are growing more adventurous with financial strategies that extend beyond the requirement that they grant 5% of their endowments. Nonprofits with alternative revenue streams — fee for service, for example — and alternative investments, like private equity funds and hedge funds, are using these creative strategies to increase their returns.

It is the job of financial advisers to make recommendations on how best to manage assets; the best insight I can offer is to stay informed on financial developments and discuss investment strategies openly with your donors. Trust me — these issues are very much on their minds.