At the end of July, the Fed hiked rates another 0.75 percentage points in an attempt to curb inflation. The markets handled the increase well, but there is a concern about what continued rate hikes could mean for the economy.
Here is a look at what has happened so far this year, and what the rest of the year could look like following these rate increases:
2022 Inflation and Rate Hike
The Fed’s July interest rate hike is the fourth so far this year, and in June, the inflation rate was at 9.1 percent. These numbers indicate a potentially precarious situation.
Right now, the unemployment rate is at a low 3.6 percent, which is where it was before the pandemic. That number hasn’t changed since April of this year, which means that rate is holding steady for now. Something to note: Jobless claims hit a record low in April, but have recently crept up 46 percent, its highest level of the year. That can be indicative of the unemployment rate increasing soon.
This is a very delicate balance. The Federal Reserve knows that increasing interest rates will likely lead to some layoffs, but it has to be done to dial back the extremely high inflation. If they push the rates too high, too fast, it could throw the country into a recession. But if they don’t act aggressively enough, the inflation rate can continue to rise.
This is a unique situation. During previous bear markets, the Fed typically responded with rate cuts. We haven’t seen the Fed increase interest rates while tightening monetary policy since the 1980s.
That’s why, as individuals, we continue to watch and monitor our own finances, as well as the situation at large. Things could change in the coming months, and it’s important to have a plan if they do.
Housing slows down
Home prices have increased sharply the past couple of years, and sales have been quick thanks to low inventory. This summer we have finally started to see a cooldown. The NAHB Housing Market Index fell to a 2-year low in July. According to the report, “13% of builders in the survey reported reducing home prices to bolster sales and/or limit cancellations.”
New home builds hit a 14-month low in June, and new home sales hit a 26-month low in June, as well. Existing home sales have also dropped, hitting their lowest levels in two years.
Are we in a recession?
The technical definition of a recession is a decline in real GDP for two consecutive quarters. By those terms, yes, we are in a recession. (According to Compound, the last 10 times we had two quarters with negative GDP growth, we were in a recession. You have to go back to 1947 to find two quarters of negative growth without a recession.)
Consumer spending, residential construction, business spending and government spending have all fallen this year, as the inflation rate continues to surge.
But there are positive markers, too. Retail sales are holding steady, and new orders for capital equipment rose 9 percent. Factor in the steady unemployment rate, and things aren’t all that bad – for now.
But the fact still remains that the economy is in a fragile state right now, and we will need to watch how employers and consumers react in the coming months.
Check here for a roundup of my posts about preparing, investing and saving during a recession.
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