The truth is that we are probably not in a recession right now (although it is possible), but there are many signs that one is just around the corner.
Sign 1: The Fed Raises Rates
Inflation has been rampant, and the Fed’s tool for dealing with rising prices lies in its ability to charge higher interest rates. This makes borrowing more expensive and slows down the economy—intentionally.
The problem is that the Fed was super-duper late in raising rates. Inflation was a growing concern throughout 2021, but the central bank only started raising rates in March 2022. Thus, the Fed needs to catch up and take much stronger action than if it started raising rates last year.
Fed Chairman Jerome Powell said this month that the central bank will continue to raise rates by half a percentage point at the end of each meeting until it is satisfied that inflation is under control, and then the Fed will continue to raise rates by a quarter of a percentage point for some that time.
Sign 2. The stock market is in the mode of selling everything
Worried that higher interest rates would cut into profits for companies, investors decided to leave.
This is bad news for people’s retirement plans. It’s also bad news for a number of investors who rely on the market for income, including intraday traders who have been counting on the stock market’s near-total rally for the better part of a decade. And that’s not good for consumer sentiment.
This is potentially bad news for the economy, as consumer spending makes up more than two-thirds of America’s gross domestic product.
Sign 3. Bond market
When investors are not so hot in stocks, they often switch to bonds. Not this time.
This usually happens when the Fed raises rates – a higher cost of borrowing makes bonds less valuable at maturity, so a higher bond interest rate (yield) will help offset this and make them more attractive to investors.
Bonds also sold off as the Fed decided to roll back its huge portfolio of Treasury bonds it bought in the wake of the pandemic to prop up the economy.
Sign 4. Chaos around the globe
What happens abroad could spread to the United States, hurting the American economy at the most inopportune moment.
What to do
Commit a new job right now: With ultra-low unemployment and plenty of vacancies, this is a market for job seekers. This can change quickly during a recession.
Capitalize on the housing boom: If you’ve been thinking about selling your home for a long time, now might be a good time to make a list. Home prices in the United States are up nearly 20% year on year, but mortgage rates are also rising, ultimately dampening demand.
Set aside some money: It is always a good idea to have liquid assets—cash, money market funds, etc.—to cover immediate needs or unforeseen situations.
Finally, some wise advice for any market: don’t let your emotions get the better of you. “Don’t invest, stay disciplined,” says certified financial planner Marie Adam. “History shows that what people — or even experts — think about the market is usually wrong. The best way to reach your long-term goals is to just keep investing and stick to your allocation.”
– Allison Morrow of CNN Business and Jeanne Sahadi contributed to this report.