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Inflation and Impact on Credit Unions
Written by Cyndie Martini
on January 31, 2023

As of January 2023, the FED is expected to hike another 25 - 50 bps (basis points) or 0.25% to 0.50% at its next FOMC meeting. It isn't yet known if the FED will continue hiking after that.

In 2022, the FED hiked a cumulative 4.25%, including four consecutive 0.75 hikes between June and November. This was the most 0.75 hikes since 1994 when the FED hiked 0.75 only once.

2023 starts with the FED funds target at 4.25%-4.50%, which is the highest level since 2007. The FED is anticipated to continue hiking until rates are over 5%. 

"Over the course of the year, we have taken forceful actions to tighten the stance of monetary policy," Fed chair Jerome Powell said in December. "We have covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do."

The Bureau of Labor Statistics shows that month-over-month inflation peaked in September of 2022 at 6.6%. It has trended down, with December reporting 5.7% inflation. That's compared to just 1.3% in February of 2022.

In addition to inflation, another problem for the FED is the low employment rate. It was above 4% only once in 2022 (4% in January). It has since bobbed between 3.5% - 3.8%. December reported 3.5% employment. Numbers like this will keep the FED on guard, potentially providing enough motivation for more rate hikes. The FED wants to see unemployment rise, not stay low or go lower.

Rising unemployment means fewer people with jobs, which leads to less spending. Less spending eventually leads to lower inflation. The FED is limited in its ability to fight inflation. It can't fix supply chain issues, bring inflation down quickly, or stop spending due to government stimulus.

Rate hikes are a very blunt tool and take time to work into the system. This, along with trying to gauge the rate of inflation, keeps the FED's hiking campaign open-ended.


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