Economist projects interest rates to surpass 2007 levels as inflation slows

Economists from Credit Union National Association (CUNA) are expecting that interest rates will soon rise past levels not seen since 2007. (iStock)

Amid the Federal Reserve’s efforts to fight inflation, interest rates are expected to surpass levels not seen since 2007, according to a new economic forecast from Credit Union National Association (CUNA).

CUNA expects interest rates to rise to an average 2.5% by the end of 2022, which would be on track with the level reached in 2007, Senior Economist Dawit Kebede said in CUNA's April 2022 Economic Update. However, it could surpass those levels in 2023, as it's predicted to rise to 3.25% by the end of next year. 

At its most recent meeting in May, the Federal Reserve elected to raise interest rates for the second time this year, raising the federal funds rate 50 basis points to a targeted range of 0.75% to 1%. But more rate hikes are likely ahead, with the Fed projecting potentially six more in the coming months as inflation soars. 

"It is very important to get inflation under control, which is why the Federal Reserve already started raising the federal funds rate, and also announced several increases throughout the year," Kebede said. "The goal is to lift rates so they prevent prices from going up, but not so high that they slow down economic activity."

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Fed seeks to lower high inflation

Inflation is currently surging near rates not seen since the 1980s. The latest report from the U.S. Bureau of Labor Statistics (BLS) showed that the Consumer Price Index (CPI) rose 8.3% annually in April, remaining near the 40-year-high of 8.5% set a month prior.

Surging prices for gas, housing and food have kept inflation high, even as the Federal Reserve adjusts its monetary policy to bring prices back down. With the Fed's efforts, CUNA economists project that inflation will slow to 5% by the end of this year and to 3% by the end of 2023. 

This comes as the economy continues to strengthen, with the employment rate falling 40% over the last 12 months, according to CUNA. There are now two job openings for every job seeker, helping contribute to high inflation. 

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Recession risk rises for 2023 or 2024

As the Federal Reserve battles high inflation, its actions could spur a minor economic recession in the coming years.

"If the Fed turns out to be particularly skillful and lucky, these [interest] rate movements will slow the economy enough to cool inflation without causing a recession," Kebede said. "However, the risks are that the monetary tightening could cause a mild recession in 2023 or 2024."

In its latest economic outlook, Fannie Mae lowered its gross domestic product (GDP) predictions for the remainder of 2022 and 2023. It said GDP will average 2.1% by the end of 2022 and will contract to -0.1% in the fourth quarter. Fannie Mae said the recession could be similar to the magnitude of those seen in 1990 and in 2001. This outlook is down from previous, more positive forecasts that came after the COVID-19 lockdowns. Now, the mortgage giant is citing the economic damage that could come from Russia’s invasion of Ukraine and price pressures. 

Already this year, the economy unexpectedly shrank by 1.4% in the first quarter, according to the Bureau of Economic Analysis (BEA). This was down from the 6.9% growth in the fourth quarter of 2021. 

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