CU Economists React to Rate Predictions and Inflation News

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Coming out of the online Your Economy—Your Credit Union Conference on Tuesday this week, inflation continued roaring through news headlines and fueling predictions about whether the Federal Reserve will raise its short-term interest rate target in late July by 50, 75, or 100 basis points from the current 1.5 – 1.75 percent range.

Cutting through the noise, Dr. Robert Eyler and Dr. Jay Prag — both economists, university professors, credit union experts, and keynote speakers at the event — had some additional insights for credit union leaders.

“Core CPI (consumer price index) actually slipped a bit in the June 2022 numbers to 5.9 percent from just above 6 percent on an annualized basis — and the Fed wants to see that,” said Eyler, contract economist for the California and Nevada Credit Union Leagues.

He said the Fed is watching core PCE (personal consumption expenditures), which is highly correlated to CPI but less volatile. If core CPI is falling a bit, core PCE may “fall a little bit more.” But this PCE data won’t be posted for another couple of weeks.

Moreover, the Fed is watching the balance between “forward guidance” and credibility, Eyler said. The central bank has maintained it is watching core PCE in terms of how bad inflation is, and it’s trying to shape expectations so that consumers, investors, and businesses reach a certain short-term interest rate level without undermining the rest of the economy.

“A 100 basis-point increase in late July would be big, given what has happened recently. However, the Fed has bucked historic trends thus far,” Eyler noted. “Nonetheless, I think 50 basis points is more likely, especially if there is continued pressure on 10-year U.S. Treasury bonds downward and with yield-curve issues. 100 basis points would be a big shock.”

Prag noted how history isn’t always the best guide to predicting both inflation and interest rates.

“Frankly, the current CPI and PCE numbers are hard to interpret right now,” Prag said. “Core inflation, in both cases, strips out food and energy because they are historically more volatile. But history doesn’t always provide the clearest picture.”

While both food and energy prices have been rising, energy prices alone are very volatile (up and down) while food is not as volatile (steadily rising upward).

“Personally, I think ‘core’ measurements are wrong measures of trending inflation,” Prag added. “I think they are too low.”

If you didn’t make this week’s online economic conference, now is your chance to view the recording!

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