The labor market and the economy will be in bad shape for some time. With all the chatter about inflation and recession, it’s hard to understand what’s going on. Let’s break it down.
A combination of pent-up demand from the pandemic, supply chain disruptions, trillions of dollars flooded into the market by the Federal Reserve Bank, and massive fiscal stimulus packages from the Trump and Biden administrations have helped fuel the inflation.
Galloping inflation is ruinous for a country. Costs are spiraling out of control. The poor are disproportionately affected, as they typically don’t have emergency funds or the ability to earn more than the rising rate of inflation to keep their heads above water.
To lessen the negative impact of inflation, Jerome Powell, the head of the Federal Reserve Bank, announced that he would raise interest rates to fight inflation and cool the economy. If you’ve looked to buy a home recently, you’ve seen what higher inflation rates look like. Not so long ago, you were paying 3% for your mortgage; now it’s around 6%. Monthly mortgages and interest payments have become significantly higher. This is true for credit cards and other loan products.
How Higher Interest Rates Affect You
The Fed plans to raise interest rates by a full percentage point this month. The increase would be the biggest hike since the 1980s. In the past, Fed leaders avoided raising interest rates. They were concerned about political backlash and stifling growth. While the Fed has already raised rates by 0.75% last month, Jerome Powell is serious. It plans to raise rates by 3.4% by the end of 2022.
According to a CBS News analysis, rising interest rates are making loan costs more expensive. Every 0.25% increase results in an additional $25 per year in interest on $10,000 of debt. For example, when rates increase by a whole percentage point, it will cost $100 per year on $10,000 of credit card debt. Each percentage increase will make the loan more expensive. If you have variable rate debt with credit cards, home or car loans, or an adjustable mortgage, you will be in for a shock.
What led to this problem?
The Fed, during the virus outbreak, in addition to sending stimulus checks to families, engaged in financial engineering that gave corporations, venture capitalists and ultra-wealthy Americans access at artificially suppressed low interest rates. This money has been used to fund hundreds of startups, invest in the stock market, buy back shares, and fund private equity activities. So much money flowed freely that a huge bubble formed. Hiring has increased to meet demand.
The problem is that it was not organic. The Frankenstein Monster was created by the Fed and the United States Federal Government. As any young child knows, if you keep blowing a bubble, it will burst. That’s what the Americans saw. The ramifications are layoffs, hiring freezes, falling stocks and crashing cryptocurrencies.
Economists and forecasters on Wall Street failed to take into account that the global pandemic would create massive supply chain disruption. They also missed Russia’s invasion of Ukraine. Both countries have significant amounts of oil and wheat respectively. Delays in the transport of goods added fuel to the fire. President Joe Biden and others in his administration are adding rising business prices as another culprit in the cause of inflation. Former Amazon CEO Jeff Bezos took umbrage at Biden’s assertion.
What you should expect
In an editorial of FinancialTimes of the consumer price index reaching over 9%, Mohamed El-Erian, president of Queens’ College, University of Cambridge and adviser to Allianz and Gramercy, wrote: “The terrible figures for June’s US inflation is a reminder of the tough days ahead for many in America.” Higher inflation will particularly hurt “the most vulnerable segments of the population and the most fragile developing countries.”
There are side effects. As more people are laid off, they can spend less, causing the economy to contract. As the economy contracts, called a recession, people will lose their jobs.
The uncomfortable fact is that this is precisely what Powell wants. Companies need to do less business and lay off more employees. The theory is that as people spend less, the price of goods and services goes down, and so does the rate of inflation. It may be an oversimplification, but it’s supposed to offer a mental model for understanding what’s going on.
Former US Treasury Secretary and Harvard University President Lawrence Summers said what most politicians don’t want to say out loud. Summer coldly offered in an interview with Bloomberg that the unemployment rate in the United States must increase by more than 5% for an extended period to curb runaway inflation. He made a dire prediction: “We need two years of unemployment at 7.5% or five years of unemployment at 6% or one year of unemployment at 10%.
Responding to Summers’ draconian view, Democratic Rep. Alexandria Ocasio-Cortez tweeted“It is unwise to manufacture a recession that would devastate our most vulnerable,” and later shared his thoughts with Powell during a congressional hearing.
What actions you could take right now
By arming yourself with knowledge about what is happening, you can take steps to protect yourself. You will continue to hear about the unemployment rate, the big quit and the fact that there are two jobs for every unemployed person. Although it is accurate, it is a lagging indicator.
As the economy weakens and interest rates rise, more job cuts will likely occur. As there will be fewer jobs, be careful. Stick firmly to your current job. If you must look for another position, spend plenty of time investigating the company’s financial situation.
If you feel the need to change jobs, approach it with due thought and caution. You don’t want to be the one without a seat when the music stops. During the interview, ask tough questions, such as, “Can I get a guarantee that I won’t be fired unless it’s for just cause?” What is the company’s financial situation? Are there any downsizing plans? Is my job offer guaranteed and will there be compensation if you break the contract? »
Keep your costs under control. Find other less expensive substitutes if credit cards or loan products charge high interest rates. Cancel subscriptions you no longer use, such as a fitness center or gym. Postpone big purchases for now and wait to see if prices drop in the future.
Don’t feel embarrassed to negotiate expensive purchases. Instead, look for ways to generate additional income to keep up with inflation. This could be taking on a second job, getting a gig role, starting an online business, or pursuing other endeavors.
Finally, stay positive. Although this particular pattern of fact is somewhat unusual, the US economy regularly swings between booms and busts. So hang in there, get out there and hopefully things will improve after three to six months plus.