MADISON, Wis.–With the Fed now embarking on a monetary tightening cycle, credit unions should look for lending to slow next year and a recession by early 2025, according to a new CUNA Mutual forecast.
As part of CUNA Mutual’s March Trends Report, the company’s chief economist, Steve Rick, noted the Fed’s March 17 move to raise the federal funds effective interest rate to 0.33% was the first move to increase rates since March 16, 2020.
Rick noted the Fed has now embarked on a monetary tightening cycle with interest rates expected to rise toward their neutral fed funds interest rate of 2.5%.
“What impact will a rising fed funds interest rate have on credit union lending and the economy in general?” asked Rick. “Historically, a rising fed funds interest rate slows credit union loan growth, holding all other factors constant. There have been three Fed hiking cycles since 1999. Every time, credit union lending fell from around an 11% seasonally adjusted annualized growth rate at the start of the hiking cycle to around 7% at the end of the hiking cycle, with about an 18-month lag from the beginning of the hiking cycle until credit union lending began to slow.”
Rick quoted Mark Twain’s observation that “History doesn’t repeat itself, but it does rhyme” to point out that in January, credit union lending grew close to an 11% seasonally adjusted annualized growth rate.
What’s Likely Ahead
“If history repeats itself, we could see credit union lending begin to slow in the fourth quarter of 2023,” he stated. “For the overall economy, it takes an average of around three years from the first Fed hike to the onset of a recession. That would put the next recession in March of 2025. If short-term interest rates rise above long-term interest rates (an inverted yield curve) the economy typically falls into recession 12-18 months later. The big concern regarding the current Fed hiking cycle is that there is a high probability the yield curve inverts in the next year. Currently, the two-year Treasury interest rate is 1.94%, only 36 basis points below the 2.20% 10-year Treasury interest rate. This could put the next recession in the summer of 2024.”
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