It’s a possibility we can’t ignore.
Most important points:
- The Federal Reserve is raising interest rates to cool inflation and give consumers relief.
- His aggressive stance could eventually fuel a recession, worsening the financial situation of many people.
It’s fair to say that inflation has been spiraling out of control for over a year now. And even employees who have seen their earnings increase in the past year feel pressured.
The Federal Reserve, meanwhile, is on a mission to cool inflation. And it tries to do this by aggressively raising interest rates.
In particular, the Fed has just raised its benchmark rate by 0.75% for the third time in a row. And if this continues, we could end up in a difficult position economically.
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To be clear, the Fed has the best intentions. It’s no secret that consumers across the country are consistently building up credit card debt and looting their savings to keep afloat. But if the Fed doesn’t slow things down, we could have an economic recession in the short term. And at that point, many people may see their personal financial situation deteriorate rather than improve.
Why aggressive rate hikes could fuel a recession?
The reason inflation has risen so quickly has to do with a decoupling between supply and demand. Last year, Americans were aware of a number of financial windfalls — incentives and monthly child tax credits — at a time when supply chains were slowing down due to the pandemic. As such, there were not enough goods to meet consumer demand. And every time you have such a gap, the prices go up.
This is where interest rate hikes come in. While the Fed doesn’t directly set consumer lending rates, the cost of borrowing through loans and credit cards typically rises when it raises its federal fund rate (the rate banks charge each other for short-term loans). And while that’s a bad thing to some extent, it can also lead to less consumer spending, bridging the aforementioned supply-demand gap and driving down the cost of living.
The danger of the Fed’s actions is that consumer spending could fall significantly rather than moderately. If that happens, it could be enough to fuel a recession. And a recession, in turn, can lead to widespread job losses and worlds of financial grief for many people.
Will stimulus checks be approved if a recession hits?
Stimulus controls are not going to solve the inflation problem. If anything, they can drive up the cost of living even more. But if a recession hits, it’s reasonable to assume that stimulus controls could come into play again.
The federal government has a history of approving stimulus payments during periods of widespread economic distress. And so if a recession comes and it’s a real doozy, there’s a chance lawmakers could pass a stimulus round to pump money into the economy and break that cycle.
At the moment, the idea of a new stimulus package is really only speculative, especially since we cannot say for sure that we are doomed to a prolonged economic recession. At the same time, we cannot exclude the possibility that things are about to deteriorate. And if stimulus controls are the silver lining that keeps us calm in the face of recession fears, so be it.