Source: Larry Harris
To control the recent surge in inflation, the Federal Reserve announced that it would continue to raise interest rates.
When rates are high, consumers get a better return on the money they store in a bank account and have to pay more to get a loan, which may encourage them to borrow less.
“Rising interest rates stifle spending by increasing the cost of financing,” Harris said.
This leaves less money circulating in the economy and growth begins to slow.
Fears that the Fed’s aggressive actions could tip the economy into a recession have already sent markets tumbling for weeks in a row.
The war in Ukraine, which has contributed to rising fuel prices, a labor shortage and another wave of Covid infections, poses additional challenges, Harris said.
“There have been huge things happening in the economy and huge government spending,” he said. “When the balances get big, the adjustments have to be big.
“There will be a day of reckoning, the question is how soon.”
The last recession was in 2020, which was also the first recession some young millennials and Gen Zers have ever experienced.
But, in fact, recessions are quite common and before Covid there had been 13 since the Great Depression, each marked by a significant drop in economic activity lasting several months, according to data from the National Bureau of Economic Research. .
Prepare for tight budgets, Harris said. For the average consumer, this means “eating out less often, replacing less often, traveling less, squatting, buying a burger instead of a steak” .
Although the impact of a recession will be felt widely, each household will experience such a setback to a different degree, depending on their income, savings and financial situation.
Still, there are a few ways to prepare that are universal, Harris said.
- Streamline your expenses. “If they expect to be forced to cut spending, the sooner they do it, the better off they’ll be,” Harris said. That might mean cutting back on a few expenses now that you just want and really don’t need, like subscription services you signed up for during the pandemic. If you don’t use it, lose it.
- Avoid variable rates. Most credit cards have a variable annual percentage rate, which means there is a direct link to the Fed’s benchmark, so anyone with a balance will see their interest charges increase to every Fed move. Homeowners with variable rate mortgages or home equity lines of credit, which are indexed to the prime rate, will also be affected.
This makes it a particularly good time to identify outstanding loans and see if refinancing makes sense. “If there’s an opportunity to refinance at a fixed rate, do it now before rates rise further,” Harris said.
- Hide extra money in I bonds. These federally-backed inflation-protected assets are nearly risk-free and pay an annual rate of 9.62% through October, the highest yield on record.
While there are purchase limits and you can’t mine the money for at least a year, you’ll get a much better return than a one-year savings account or certificate of deposit, which yields less than 1.5%.
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