Credit unions should brace for a slowdown or recession - NAFCU Senior Economist Curt Long

Credit unions should brace for a slowdown or recession after the Fed slammed on the brakes with its largest rate hike in nearly 30 years, a NAFCU economist said Wednesday.

NAFCU Senior Economist Curt Long said Wedneday’s 75-basis-point increase in the federal funds rate was the largest since 1994, and half of the members of the Fed’s Open Market Committee (FOMC) expect to raise the rate by at least another 175 basis points by year’s end.

“That is a sharp departure from the committee’s forecast three months ago, and the rest of the economic projections bear that out,” Long said.

The measures are part of the Fed’s commitment to halt inflation as soon as it can. Its goal continues to be a 2% annual inflation rate.

On June 10 the U.S. Bureau of Labor Statistics reported that inflation rose 8.6% from May 2021 to May 2022, the largest 12-month gain since December 1981.

Curt Long

Half of FOMC members expect the personal consumption expenditure measure of inflation to recede to 5.2% or less in this year’s fourth quarter. At its March 15-16 meeting, the median inflation expectation was 4.3% by the fourth quarter. The current median expectation is 2.6% by the end of 2023 and 2.2% by the end of 2024 – both medians are little changed from March.

Members also lowered their expectations of economic growth. Half now think gross domestic product will increase 1.7% this year, down from a 2.8% median in March. Members are also expecting higher unemployment, reaching 4.1% by the end of 2024.

“It is clear the FOMC believes it has no choice but to flirt with a recession in order to address inflation, and credit unions should seek to remain as nimble as possible in a rapidly changing and highly uncertain economic environment,” Long said.

In its statement Wednesday, the FOMC said overall economic activity appeared to have picked up after edging down in the first quarter with robust job gains and low unemployment.

However, it noted “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures.”

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” it said. “The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.”

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said the Fed is “racing to catch up to economic events.”

Mike Fratantoni

Besides raising the federal funds rate, the Fed also said it would continue to reduce its balance sheet, including its holdings of mortgage-backed securities, which Fratantoni said is another factor putting upward pressure on mortgage rates.

“The housing market has slowed considerably over the past month as rate increases have taken hold,” Fratantoni said. “We expect that this slower pace will remain through the summer, but buyers could return later this year if the Fed’s plans are better understood by the market and lead to less rate volatility.”

Jim DuPlessis

A journalist for decades.