To keep with the theme of walking, and because this week the US Federal Reserve “walked up” its benchmark interest rate, a brief discussion is warranted about interest rates, recessions, and the economy. By the way, the weather is HOT as heck, so today’s is a shorter post.
In the accompanying photo please note the mountains in the distance – which could be equated to higher ground, higher prices, and higher interest rates. The walkers seem not to be panicking (yet) because it is early in the higher interest rate progression. Think:
Higher interest rates in the short-term for,
- Home mortgages
- Car loans
- Credit cards.
Higher interest rates as set recently by the US Fed may (emphasis, “may“) soon cool higher prices for,
- Real estate including houses, condominiums & commercial/business properties
- Cars, trucks, and SUVs
- Gas & fuel
- Wages
- Among other items.
Most simply, the Federal Reserve is trying to quickly tame runaway inflation while aiming to prevent a severe recession. Recent economic numbers may already indicate the start of a mild US recession. A mild recession is when there can be job losses but not severe job losses; there is slower hiring and little to no pay raises. A mild recession can also mean that companies continue to be able to operate but with less short-term demand for their products or services. Prices can eventually come down.
A severe recession is when there are large-scale layoffs, much lower demand, a general slow-down in manufacturing/productivity and a loss of confidence (and worse) by US consumers and the general population. Prices and demand come down, possibly for a prolonged period.
The US Federal Reserve is attempting to arrive at a “soft landing” or mild recession in order to avoid a severe recession. The Fed is “walking up” short-term interest rates. The results can take months and sometimes one to two years to play out. Now is the time to wait and see.