With a Recession Looming and Interest Rates Rising, What's Next for the Economy? Recent news and updates on the economic state for 2023.
By Dominic Blanco Edited by Micah Zimmerman
Opinions expressed by BIZ Experiences contributors are their own.
The S&P 500 is down nearly 20% year-to-date, the dollar has lost lots of buying power, and the fed has made it increasingly difficult for young buyers to purchase their first home.
With all these factors at play, it is essential to listen to economic experts like Jerome Powell. Powell spoke on interest rates again in early September. The Fed is expected to continue raising interest rates until the inflation numbers are under control. "Restoring price stability will take some time and requires using our tools forcefully to bring supply and demand into better balance," Mr. Powell said in those remarks. "While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."
The Feds have raised rates four times in the past year and are set to increase the prime rate, with inflation being their number one enemy. As a result, consumer borrowing is about to get way more complicated. It is essential to understand how the federal funds rate works to understand what is happening. It is the rate set by the Central Bank at which banks lend funds to each other overnight.
Consumers will not be paying these rates directly, but the excess will make its way into consumer borrowing and financing. Credit cards, adjustable-rate mortgages and home equity lines of credit will all be affected by the raised prime rate.
Related: The Coming Recession Won't Derail These 4 Startup Sectors
What do rate hikes mean for new homebuyers?
Inflation — coupled with high mortgage rates — and record-high home prices are chipping away at housing affordability. Real estate prices have been known to fluctuate due to changing economic conditions. However, they have seen some outlandish and unsustainable spikes in recent years.
The COVID-19 pandemic drastically affected our economy and will continue to have rippling effects for years. To illustrate the significance of this problem, Statista did a study on housing prices from 2015 through 2022 and found that they have outpaced wage increases by nearly 36%, making the home-buying process increasingly difficult for young buyers to make the transition from renters to homeowners.
How will current homeowners be impacted?
To start, fewer buyers would benefit from a refinance. The demand for new mortgages has fallen by a third, making home equity lines of credit less attractive. This will have a direct impact on foreclosures and property improvements and expansions. It will likely take years for novice real estate investors to start their home-buying journeys. Homeowners with adjustable-rate mortgages will suffer from paying higher interest in the coming months.
Related: 7 Recession-Proof Industries to Protect Your Money
What will happen to credit card interest rates?
Consumers that carry credit card debt every month will end up paying a significantly higher interest rate as a result of these actions taken by the Fed. Now that the Fed has announced a 75 basis point spike, consumers with credit card debt will spend an additional $5.3 billion on interest this year alone.
What other types of financing will be affected?
Student loans are starting to see an increase in interest rates. Federal loans saw an increase in interest rates to 4.9% after last year. Private loans will be directly affected by the prime rate and will be adjusted accordingly. Overall, the outlook for students with significant amounts of education debt is bleak. There are options for student loan forgiveness, coupled with new economic policies forgiving up to $10,000 in student loan debt from the Biden administration if one meets specific stipulations and requirements. This new program applies only to federal loans and not private equity borrowing.
What is the economic outlook leading into 2023?
The takeaway is that the Federal Reserve is intentionally slowing down business growth and consumer borrowing and creating a scarcity of money to damper the effects of the record inflation number we have seen this past year. We will likely see several new rate spikes in November and December this year.
The stock market will likely continue to decline until there is a pivot in the direction of the Feds. This could be bad news for expected retirees. 401k plans and retirement accounts have taken a massive toll due to these occurrences. One should never try to time a recession; however, it is crucial to speak with a qualified fiduciary or certified financial planner during uncertain market instability. Most will advise having enough cash to last an average of 6 months based on your essential needs. This will allow time, if needed during a recession, to stay afloat.
The good news is that tough times never last. The stock market has always been able to rebound and prove itself throughout history. Stay calm, patient, and persistent!
Related: Is a Recession Actually a Good Time to Expand Your Business?
