WASHINGTON–With a new report on inflation released late last week, with the Fed meeting to talk rates at midweek and with a jobs report to be released on Friday, this will be a week that has the attention of many economists.
Dawit Kebede
And that includes CUNA’s Dawit Kebede, who said the trade group last week released its economic update with a special focus on how inflation is becoming a challenge to the economy.
“The Fed is going to raise interest rates over the coming meetings, including this week, when we expect a 50 basis point increase. It is also going to reduce its balance sheet,” said Kebede. “This policy response may have an impact of slowing consumer spending. But other factors could offset these impacts. The low unemployment rate and pent-up consumer demand will offset the effect of the increase of interest rates on spending. The economy is still going to grow faster.”
Downward Revisions
Kebede said CUNA has also revised down slightly its forecast for loan and membership growth among credit unions compared with earlier forecasts, “but it will still be similar to the previous 10-year period.”
Kebede further forecast that CU earnings will remain under pressure because many of the contributors to CUs’ strong 2021 bottom lines, such as funds from allowances that were not needed won’t be available, plus this year’s higher operating expenses, will provide new strains.
As for Friday’s job report, Kebede said the market is very strong and he and CUNA expect it will remain so.
“Initial (jobless) claims remain very low, and continued claims are at their lowest levels since the 1970s,” he said. “There are still more job vacancies open compared to people looking for work. The labor market is in very strong condition. We expect 350,000 nonfarm payroll jobs to be added.”
Other Points
Other predictions offered by Kebede:
- Interest rates could surpass levels not seen since 2007: CUNA economists expect interest rates to reach 2.50% by the end of 2022 (2007 levels), rising to 3.25% by year-end 2023.
- Inflation expected to slow down: The rate of core inflation rose by 0.3% in March compared to 0.5% in February. CUNA economists said they expect inflation over a 12-month period to slow down from a 40-year record high to 5.0% by the end of this year and 3.0% by the end of 2023.
Fed Needs Skills
“If the Fed turns out to be particularly skillful and lucky, these [interest] rate movements will slow the economy enough to cool inflation without causing a recession. However, the risks are that the monetary tightening could cause a mild recession in 2023 or 2024,” said Kebede. “It is very important to get inflation under control, which is why the Federal Reserve already started raising the federal funds rate, and also announced several increases throughout the year…. The goal is to lift rates so they prevent prices from going up, but not so high that they slow down economic activity.”
Prediction For 10-Year Treasury
Finally, Kebede also offered this: “Although difficult to forecast, we expect the 10-year Treasury rate to rise to 3.25% by December 2022, and to 3.5% next year.”
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