Now the Fed has little choice but to tighten policy by aggressively hiking rates to curb inflation. That materially increases the risk of pushing the economy into a full-blown recession.
For the average investor, it’s hard to find a place to hide. Recessions are usually accompanied by outright bear markets, with stocks falling by well over 20%, and often by much more. And with the Fed now hiking rates aggressively, the bond market is no safe haven. Equities and bonds are riskier than usual, and surging inflation means that even cash under the mattress is losing its purchasing power.
What can Americans do? One answer may be to do nothing, and just try and ride out the volatility without trying to time the market. For those willing to lock up some money for at least a year, inflation-protected Treasury bonds could be part of the mix.
Consumers might consider cutting back on non-essential spending, especially avoiding splurging on big-ticket items. With recession storm clouds looming, it is a good idea to sock some money away for a rainy day.
And for job seekers, because recessions lead to major job losses, now is the time to update the resume and make any career moves while the job market is still hot. Keep in mind: The relatively secure jobs are with companies whose products or services customers need day in and day out — even during a recession — making such firms less vulnerable to the economy’s troubles.
There will be more difficult economic news to come. And prudence calls for skepticism about any soothing words from the Fed, the Biden administration or Wall Street bulls about a hoped-for soft landing. But preparing ahead of time can help soften the blow.
Having missed the opportunity to raise rates last year, the Fed is now risking recession in order to tame inflation. As a result, realistically and objectively, it’s time to be on guard.
Correction: An earlier version of this article misstated the direction in which the Federal Reserve must move on interest rates in order to curb inflation.