Experts have been talking about a possible recession for quite some time. Some at the Federal Reserve have even predicted that “the potential economic effects of the recent banking-sector developments” would lead to “a mild recession starting later this year.”
The Federal Reserve plays a big part in our economy due to its direct involvement with monetary policy. Since early 2022 the Federal Reserve has been raising interest rates faster than they have in decades. Some interpret this as a recession indicator.
“For the past 15 years, interest rates have been low or even non-existent, and people have been spending a lot, says Baruch Silvermann, financial expert and CEO of The Smart Investor. “To balance things out, the Federal Reserve has decided to take measures to reduce excessive demand. However, it usually takes 9 to 18 months for the effects of these new rates to fully show up in the economy, so we haven’t seen the complete impact just yet.”
Economists have also pointed to the inverted yield curve as a recessionary sign. A yield curve is a line that plots the interest rates of bonds that have equal credit quality but different maturity dates. The yield curve is used to predict future interest rate changes and economic activity.
Normal curves point to economic expansion, while inverted yield curves point to economic contraction. An inverted yield curve has preceded every recession in the U.S. since the 1950s.
But the news isn’t all doom and gloom. Some economists believe a recession isn’t on the horizon due to the country’s strong labor market.
Whether or not a recession occurs, it is important to be prepared. You should understand how the economy can affect your money so you can make the right choices financially.
Six Ways the Economy Could Affect Your Money
The economy affects your money in many ways. Here are six ways you could be affected over the next six months.
1. Job Security
Economic conditions have a big effect on businesses. When things are good, companies want to expand their workforce to accommodate growth. However, when the economy contracts, businesses start looking for ways to cut costs, which usually leads to higher unemployment.
“Over the next 3 to 6 months, I predict many companies will start to struggle due to the economic pressures caused by these high interest rates,” says Silvermann. “As a result, they may have no choice but to lay off employees, even in industries that have already done so, and some companies might have to make further job cuts.”
2. Higher Rates on Savings
As the Federal Reserve raises the Fed Funds Rate, you may see higher rates on your savings accounts. Just as rates to borrow money increase, the rate for savings also increases. This means that recessions are a great time to put extra money in your savings account if you can.
3. Increased Borrowing Costs
If the United States were to default on its debt, the cost for the United States to borrow money would increase. This is because there would be an increased risk for lenders to hold U.S Treasury debt. The result would be higher interest rates for consumers. When interest rates are higher, it costs more to borrow money. Things like mortgage rates, personal loan interest rates, and credit card interest rates would continue to increase.
If you can avoid taking out new debt during an economic recession, it will help you save money on interest over the long term. If you have loans with variable interest rates (also called adjustable or floating interest rates), this may be unavoidable, however.
4. Smaller Salary Increases
Along with reduced job security, recessions also make it less likely that businesses will hand out pay increases to their employees. Plus, since unemployment will be on the rise, there will be more competition for certain jobs. That means employers won’t feel they need to incentivize people with more money just to work for them.
5. Stricter Lending Practices
When the economy is struggling, you may have difficulty getting approved for loans. Banks and other lenders tend to have stricter lending practices because they can’t afford to take on as much risk. While a lender might have approved someone with a 670 credit score before, during a recession, they may not consider someone below 720.
6. Possible Volatility With Stock Market
When the economy becomes more unstable, the stock market becomes a little more volatile. Company earnings tend to fall, which can have a negative effect on the overall market. This is why it’s usually better for the average investor to invest for the long term because they’ll be able to ignore much of the noise.
The Bottom Line
The economy has a large effect on your money, so it is important to understand what is happening in the economy. The economy always goes through ups and downs, so don’t stress too much about an upcoming recession. The best thing you can do is be educated and be prepared.