The early 1980s hyperinflation set the stage for the Fed’s current actions. The Federal Reserve raises interest rates and tightens the money supply to cool an overheated economy. This causes the economy to contract and ultimately leads to a burst of inflation at the expense of recession. The storm will hit at the end of 2023 or the beginning of 2024. Its logic is based on history, which shows a one-year lag between monetary policy changes and the real-world economic impact of those changes.
Some predict the recession will arrive earlier, around the middle of the year. Still, one thing is certain: 2023 will bring economic turmoil.
During the Great Depression, it was easy for banks to provide cheap and easy credit to unqualified borrowers to finance risky and irresponsible subprime loans under the strictest terms. On the other hand, banks and investors were left holding trillions of dollars in worthless mortgages and mortgage-backed securities after the housing bubble burst.
Inflation drove the housing market to new highs in 2021, but it wasn’t a bubble. Supply chain issues, inventory shortages, a lumber crisis, COVID shutdowns, record-low interest rates, and the rise of remote work all contributed to inflationary pressures. None of these pressures, however, indicate the widespread rot that underpinned the housing market before the Great Recession. During the Great Recession of 2009, the unemployment rate reached 10%.
Despite inflation, bear stocks, and a cooling housing market, the seemingly invincible employment market continues to power through. However, if there is a recession, unemployment will almost certainly rise.
The Future Is Uncertain
It is impossible to predict whether it will return to double digits. Still, there are steps you can take now to protect yourself from job loss later in the year.
Consider paying off high-interest debt as soon as possible to protect your finances from a recession. Your credit score is also important to consider when entering a recession. When a recession hits, an individual’s credit score becomes even more important because people have to take on more credit or debt. Making consistent payments is an important part of maintaining a good credit score.
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