MADISON, Wis.–The Fed’s move to increase the federal funds rate by 75 basis points does not mean “the sky is falling,” and while a recession is more likely in 2023, credit union lending remains strong, according to a CUNA economist.
CUNA’s deputy chief advocacy officer and chief economist, Mike Schenk, said it is his opinion the “sky is not falling and it is likely the Fed can orchestrate a soft landing--not that they have a great track record on that front.”
“But I think the fundamentals are lined up to ensure that that might happen barring any unforeseen, exogenous shocks,” he continued. “Essentially what the Fed did last week (when it raised rates 75 basis points) was answer all questions over whether they care deeply about inflation…it was a much stronger move than what most people were expecting.”
A Shift in Priorities
Looking to Fed Chairman Jay Powell’s testimony before the Senate today and the House tomorrow, Schenk said he expects Fed to express the concern the Fed has around inflation. But he noted the Fed has also signaled a shift in its priorities.
Schenk said the Fed has “walked away” from strong support for labor markets—one of the two primary priorities of the Federal Reserve—and is instead sending the message that “bringing inflation down is job one.”
“The Fed’s baseline for the moment is calling for the Fed funds rate to finish this year at 3.5%, 3.8% by the end of next year and then in 2024 coming back down to 3.5%,” Schenk said. “Essentially what that means is the Fed has aggressively moved up its schedule for interest rate increases.”
Schenk noted the Fed’s more aggressive posture has forced CUNA to recalibrate and adjust its own forecast for rates. He is forecasting another 50 basis point increase in the Fed funds rate in July, 50 more in September, and two more increases in November and December of 25 basis points each.
The CU Loan Forecast
“We think that while that is an aggressive move it can still be supported by a growing economy. In particular, from credit unions’ perspective, we have loans growing at 8% this year, 7% next year,” Schenk said. “We will revisit that baseline forecast but I would be surprised if we have any really significant changes, especially to the credit union outlook.”
Schenk noted credit unions’ loan portfolios grew by nearly 6% by May 30, and that loan growth is almost always very strong among CUs in the second half of the year.
He added that the Fed rate increases do increase the likelihood of a recession, especially in 2023.
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