Ever since the Fed started aggressively hiking rates in March, the big R word has been on everyone’s mind: Recession.
The National Bureau of Economic Research’s official definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” An unofficial but popular benchmark is two consecutive quarters of negative gross domestic product (GDP) growth, which the U.S. experienced in the summer of 2022.
In order to tamp down runaway inflation, the Fed needs to slow down the economy. It’s doing so by raising interest rates, which will increase the cost of borrowing for businesses and consumers alike and reduce demand for goods and services. But this comes at a cost: with higher costs for businesses and less demand from consumers, economic activity will likely fall and unemployment will likely rise.
“It’s common for the economy to fall into a recession with aggressive rate hikes,” says Denise Downey, a certified financial planner and founder of Financial Trex, a financial planning firm. “We’ve seen [it] in the past [and] I wouldn’t be surprised if it happens again.”
Fed Chairman Jerome Powell has made it clear that taming inflation is the top priority, even if it means some short-term pain in the economy. “There will be some softening in labor market conditions,” Powell said in a press conference following today’s announcement of a 0.5% rate hike. “I wish there were a completely painless way to restore price stability. There isn’t. This is the best we can do.”
Even though the Fed is expecting higher unemployment next year, whether we enter a true recession is still up in the air. “I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not,” Powell said. “It’s not knowable.”
Whether or not we officially enter a recession, many Americans are already feeling the financial squeeze from rising prices and several high-profile waves of corporate layoffs. Here are some steps you can take to boost your financial security no matter what happens in the macroeconomic environment:
- Make a budget and financial plan
- Build an emergency fund with three to six months’ of living expenses
- Develop your career by learning new skills, networking, and updating your LinkedIn and resume, even if you’re not currently looking for a job
- Increase your income by negotiating a raise, switching jobs, or starting a side hustle
Read More: Live Coverage: What the Fed’s Latest 0.5% Rate Hike Means For Your Money