Ask Chuck: Recession fears rising

Dear Chuck,

The Federal Reserve raised interest rates — again. I’m hearing murmurs of a recession, and though most think it will be mild, it creates fear and trembling. How can I prepare myself?

Recession Fears

Dear Recession Fears,

Raising interest rates is a means to try to tap the brakes on inflation. It does not necessarily lead to a recession — although it can. Let’s look at some of the data and expert opinions related to your fear of a recession; then I will offer my advice. 

Interest rates and recession fears

On February 1st, the Federal Reserve raised interest rates by 25 basis points (.25%) in an effort to reach a pre-pandemic level of 2% inflation. Fed Chair Jerome Powell said, “I don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not, it’s just, it’s not knowable.”

Janet Yellen, Treasury Secretary, stated, “I’m reasonably satisfied by the data that I’ve seen so far, but I don’t want to minimize the risk of recession. The path that I see, to maintaining a strong labor market while bringing inflation down, does involve a slowdown in growth.” She agrees with Powell’s plan but also has concerns. On Monday, February 6th, she said, “You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years.”

Kristalina Georgieva, International Monetary Fund managing director, remarked, “Based on the data we have today, we think the U.S. would be able to go through the year narrowly avoiding falling into recession. That means a possibility for a soft landing for the United States.”

Ryan Sweet, the chief economist at Oxford Economics, stated, “A recession will occur at some point. It doesn’t have to be next month or next year, but at some point, we will experience it.”

He believes the next recession will be mild. 

Brian Moynihan, Bank of America CEO, explained that he expects a mild recession to hit the economy. Inflation and high-interest rates could drag down corporate earnings and send the economy downward. In addition, he hopes our government does not default on its debt. “We have to be prepared for that, not only in this country but in other countries around the world. You hope it doesn’t happen, but hope is not a strategy — so you prepare for it.”

Fear not

The comment above by Ryan Sweet at Oxford Economics is a sure bet: “At some point, we will experience it.” Of course, we will; recessions are part of the economic cycle of our nation. I’ve survived several, and you can too. The key is being prepared so you can ride it out without undue stress or fear. 

“Fear not, for I am with you; be not dismayed, for I am your God; I will strengthen you, I will help you, I will uphold you with my righteous right hand” (Isaiah 41:10, ESV)

How to prepare for a recession

The Dos:

• Do work diligently to protect your job.
• Do reduce discretionary spending.
• Do reduce non-discretionary spending: utility bills, insurance, phone plans, etc.
• Do pay down credit card debt. Christian Credit Counselors can help.
• Do build emergency savings.
• Do protect retirement savings; consider CDs or 3–6 month Treasury bills.
• Do use a budget, set goals, and plan ahead. Work with a trained budget coach.
• Do make short-term sacrifices while keeping a positive attitude.
• Do be content and grateful for what you have.
• Do continue to give, and remember God owns it all.

The Don’ts:

• Don’t procrastinate or just hope you will be okay. Act now.
• Don’t assume new debt.
• Don’t panic, make impulsive decisions, or make risky investments.
• Don’t borrow against your 401(k) or 403(b), except in absolute emergencies.
• Don’t take out a home equity loan, except in absolute emergencies.
• Don’t continue bad spending habits.
• Don’t continue unnecessary subscriptions.
• Don’t grumble or grow pessimistic.
• Don’t do this alone. Recruit friends and family to join you.

Invest wisely

Trying to time the market is a futile exercise. None of us know when or how long the next recession could last or the effect at large. Many, many experts recommend investing with a long-term approach and avoiding obsessively checking your portfolio. Yes, you may experience loss, but you could also profit in the recovery. Time and diversification are key. Consult a trusted financial advisor for more details.

Matthew Frankel, CFP at the Motley Fool, says to avoid speculating during a recession. Focus on top-quality companies in turbulent times. In addition: 

• Don’t try to time the bottom.
• Don’t day trade.
• Don’t sell just because your stocks go down.

Avoid lifestyle inflation

One of the greatest ways to build financial margin is to learn to be content with what you have. Lifestyle inflation (or lifestyle creep) occurs when people get pay raises and increase their overhead with expensive cars, homes, trips, etc., instead of increasing their giving, saving, and investing. I know people who have intentionally decided to raise their children in a small home or condo. The motivation is to avoid the costs of upsizing and then downsizing later. They are not afraid of the future because they have intentionally ignored the trappings of the world. Know what tempts you, then determine to guard your heart and mind. The more people spend on things that look like wealth, the less they have to build wealth.

I wrote about How to Recession Proof Your Finances last year.

A long-term perspective will make things of this world dim in significance. My hope is that Christians will influence others by the way they steward their lives. How we spend our time, money, and talents will prepare us for far more than just a recession; it will prepare us for our eternal future.

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