Recession is ‘likely’, says former SEC chief economist

By almost all measures, the U.S. economy made a striking recovery after the coronavirus pandemic encouraged nationwide massive shutdowns and layoffs.

The labor market has added millions of jobs and wages have risen substantially, even among lower paid positions.

But rising inflation and rapidly rising interest rates have left most Americans worried that the good times will be short lived.

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“Shall we have a recession? It’s quite likely,” said Larry Harris, the Fred V. Keenan Chair in Finance at the University of Southern California Marshall School of Business and former chief economist at the SEC.

“It is very difficult to stop inflation without a recession.”

To tame the recent inflation peak, the Federal Reserve has signaled that it will continue to raise interest rates.

When rates are high, consumers get a better return on the money they have in a bank account and have to spend more to get a loan, which can trigger them to borrow less.

“Rising interest rates are polluting spending by increasing the cost of financing,” Harris said.

There comes a day of reckoning, the question is how soon.

Larry Harris

former chief economist of the SEC

That leaves less money flowing through the economy and growth is starting to slow down.

Fears that the Fed’s aggressive movements could plunge the economy into a recession have plagued markets for weeks.

The war in Ukraine, which has contributed to rising fuel prices, a shortage of labor and another wave of Covid infections pose additional challenges, Harris said.

“Enormous things have happened in the economy and enormous government spending,” he said. “As balances grow, adjustments must be large.

“There comes a day of reckoning, the question is how soon.”

The last recession took place in 2020, which was also the first recession that some younger millennials and Gen Zers had ever experienced.

But in fact, recessions are fairly common and for Covid, there had been 13 of them since the Great Depression, each marked by a significant decline in economic activity that lasted several months, according to data from the National Bureau of Economic Research.

Be prepared for budgets to push, Harris said. For the average consumer, that means “they eat out less often, they replace things less often, they do not travel as much, they crave, they buy hamburgers instead of steak.”

While the impact of a recession will be felt broadly, each household will experience such a retreat to a different degree, depending on their income, savings and financial status.

However, there are a few ways to prepare that are universal, Harris said.

  • Streamline your spending. “If they expect to be forced to cut, the sooner they do it, the better they will be,” Harris said. That could mean cutting back on spending now that you just want to and really don’t need it, like the subscription services you signed up for during the pandemic. If you do not use it, you will lose it.
  • Avoid variable rates. Most credit cards have a variable annual percentage rate, which means there is a direct link to the Fed’s benchmark, so anyone who carries a balance sheet will see their interest rates jump with each move by the Fed. Homeowners with adjustable rate mortgages or equity lines linked to the prime rate will also be affected.
    That makes this a particularly good time to identify the loans you have taken out and see if refinancing makes sense. “If there is an opportunity to refinance at a fixed rate, do it now before the rates go up further,” Harris said.
  • Stash extra money in I bonds. These inflation-protected assets, supported by the federal government, are virtually risk-free and pay a 9.62% annual rate until October, the highest yield on record.
    Although there are purchase limits and you can not tap the money for at least one year, you will score a much better return than a savings account or a year certificate of deposit, which pays less than 1.5%.

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