“Are we going to be in a recession? It’s very likely,” said Larry Harris, the Fred V. Keenan chair of finance at the USC Marshall School of Business and a former chief economist at the Securities and Exchange Commission.
“It’s hard to stop inflation without a recession.”
In response to the recent surge in inflation, US Federal Reserve Indicates that rate hikes will continue.
When interest rates are higher, consumers get better returns on the money they put in their bank accounts and have to spend more to get a loan, which could prompt them to borrow less.
“Rising interest rates dampen spending by increasing funding costs,” Harris said.
This reduces the flow of money through the economy and growth begins to slow.
Concerns that the Fed’s aggressive moves could tip the economy into recession have raised concerns Markets tumble for weeks.
Higher fuel prices, labor shortages and another wave of coronavirus infections from the Ukraine war are posing more challenges, Harris said.
“There’s huge things going on in the economy, huge government spending,” he said. “When the balance gets bigger, the adjustment has to be huge.
“There will always be a day of reckoning, the question is how quickly.”
But in fact, recessions are fairly common, and before Covid, there have been 13 recessions since the Great Depression, each marked by months of notable declines in economic activity, according to data from the U.S. National Bureau of Economic Research.
Be prepared for a tight budget, Harris said. For the average consumer, that means “they eat out less often, change things less often, they don’t travel as much, they squat, they buy hamburgers instead of steaks.”
While the effects of a recession will be widely felt, each household will experience a different degree of recession, depending on their income, savings and financial situation.
Harris said there are still some common ways to prepare.
- Simplify your spending. “If they expect they’re going to be forced to cut expenses, the sooner they do that, the better off they’re going to be,” Harris said. That could mean cutting some expenses that you just want right now and don’t really need, such as your Subscription services registered during the pandemic. If you don’t use it, you lose it.
- Avoid floating rates. most credit card There’s a variable APR, which means there’s a direct link to the Fed’s benchmark, so anyone holding a balance will see their interest charges rise with every move the Fed makes.Homeowners with an adjustable rate mortgage or Home Equity Line of CreditThose tied to the prime rate will also be affected.
This makes this an especially good time to determine if you have an outstanding loan to see if refinance make sense. “If there is an opportunity to refinance to a fixed rate, do so immediately before rates rise further,” Harris said.
- Deposit additional cash in the I bond. These federally backed inflation-protected assets carry little risk, and Pay 9.62% APR through Octoberthe highest yield ever recorded.
Although there are purchase restrictions and you won’t be able to access the money for at least a year, you’ll get better returns than a savings account or a one-year certificate of deposit, which pays less than 1.5%.