Source: Larry Harris
To tame the recent spike in inflation, the Federal Reserve has signaled that it will continue to raise interest rates.
When rates are high, consumers get a better return on the money they keep in a bank account and must fork out more to get a loan, which can make them borrow less.
“Rising interest rates stifles spending by increasing the cost of financing,” Harris said.
That leaves less money flowing through the economy and growth begins to slow.
Fears that the Fed’s aggressive moves 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, labor shortages and another wave of Covid-19 infections pose additional challenges, Harris said.
“Enormous things have happened in the economy and enormous government spending,” he said. “When balances increase, the adjustments have to be large.
“There will be a day of reckoning, the question is when.”
The last recession took place in 2020, which was also the first recession experienced by some younger millennials and Gen Zers.
But in fact, recessions are quite common and before Covid, there have been 13 of them since the Great Depression, each marked by a significant decline in economic activity that lasted for several months, according to data from the National Bureau of Economic Research.
Prepare for tight budgets, Harris said. For the average consumer, this means they “eat out less often, replace things less often, don’t travel as much, snuggle up, buy burgers instead of steak.”
While the impact of a recession will be widely felt, each household will experience such a setback to a different degree, depending on their income, savings, and financial situation.
Still, there are some ways to prepare that are universal, Harris said.
- Optimize your expenses. “If they expect to be forced to cut back, the sooner they do it, the better off they’ll be,” Harris said. That may mean cutting back on some expenses now that you just want and don’t really need, like the subscription services you signed up for during the pandemic. If you don’t use it, you lose it.
- Avoid variable rates. Most credit cards have a variable annual percentage rate, which means there’s a direct connection to the Fed’s benchmark, so anyone with a balance will see their interest charges increase with every move. from the Fed. Homeowners with adjustable-rate mortgages or home equity lines of credit, which are tied to the prime rate, will also be affected.
That makes this a particularly good time to identify your outstanding loans and see if refinancing makes sense. “If there’s an opportunity to refinance to a fixed rate, do it now before rates go even higher,” Harris said.
- Save extra money on bonuses I. 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 use 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 pays less than 1.5%.
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