Every new year brings change, sometimes welcome and sometimes not so welcome, sometimes a surprise, other times not so much. As for 2022, almost everyone will agree it was the year of unexpected change! The year began with the financial markets expecting the possibility of a small rise in interest rates coupled with a gradual increase in inflation. Boy, did we get that wrong. The Federal Reserve began the most aggressive rate hiking strategy in over 40 years, pushing the benchmark fed funds rate up 425 basis points. Mortgage rates climbed more than 400 basis points to over 7%, the highest level in 20 years. Inflation surged from a stubbornly low 20-year 2% average rate to a 40-year high of 9.1%. The higher inflation rose, the more stubborn the Federal Reserve became, resolving to “stay the course until the job is done.” Financial pundits spent too many waking hours debating if the Fed was being too aggressive after first faulting the Fed for being too complacent.
The stock and bond markets vacillated between predictions of the Federal Reserve creating a deep recession and the U.S. economy remaining strong enough to avoid a recession. Stock prices and bond yields fluctuated throughout the year, ultimately creating the worst performance in decades for both financial havens. Actively managed stock mutual funds lost 19% on average this year, while bond-based portfolios lost about 12%. The price of oil rose 54% by mid-year to $105.94, only to end the year with a gain of less than 16%. The ongoing conflict between Russia and Ukraine along with China’s continued COVID lockdowns kept supply chain issues from being completely resolved, while also creating dangerous oil and grain shortages across the globe.
No one knows what 2023 will bring and, to be honest, I doubt anyone is eager to make a serious prediction given what happened in 2022. The Federal Reserve has pointedly stated it intends to push the fed funds rate to at least 5.10% and keep the rate high until there is “evidence of sustained low inflation.” The current fed funds rate of 4.25% is not even close to what the Fed considers restrictive enough to make an impact. Whether the Fed’s strategy is right or wrong, even the loudest Fed doubters are beginning to realize the Fed means business, and this is not the time to fight the Fed. Inflation is beginning to show some signs of weakening, but it still has a long way to go before it is close to the 2% target level. The labor market remains tight with job openings near the highest in history in the midst of a shrinking labor force. There are almost two available jobs per person. The unemployment rate hovers near the lowest level in almost three years. The resiliency of the labor market is a key factor in whether the economy can remain on a positive growth path. Consumers continue to spend, even if that means pushing credit card balances up 15% from a year ago. This is the fastest annual pace in over 20 years.
As for credit unions, the year was also a complete surprise. Liquidity went from flush to near zero in a matter of months. Loan demand surged despite rising interest rates. Credit unions are known for having the lowest loan rates but, with this year’s surge in rates, it is vital for credit unions to rethink pricing strategies.
I want to thank you for your support and loyalty during 2022 and send wishes for a healthy, happy and prosperous 2023. I look forward to helping you and your credit succeed in the coming year.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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