Stimulus Update: Interest Rates Rise Again. Will That Lead to a Stimulus Check?

The Fed just raised interest rates for the second time this year, and that could lead to some very precarious economic conditions.

Inflation has been a problem for U.S. consumers since the second half of 2021. And at this point, a lot of people have landed in credit card debt or completely depleted their savings just to do things like put food on the table and keep up with their essential bills.

The Federal Reserve, meanwhile, isn't happy with where inflation is sitting. As of February, the annual rate of inflation was 6%, as per that month's Consumer Price Index. Now that's an improvement from mid-2022, when inflation peaked at 9.1%. But the Fed wants inflation at 2%, and right now, we're nowhere close.

To combat inflation, the Fed has been raising its benchmark interest rate, which tends to indirectly drive up the cost of borrowing for consumers. The Fed's first rate hike this year came in February, and earlier this week, it followed up with a second one. Both 2023 rate hikes amounted to 0.25%.

The problem, though, is that the Fed has been raising interest rates since early 2022, and borrowing costs have been exploding. At some point, consumers are apt to take an "enough is enough" attitude and cut their spending.

But if they do so to an extreme, it could be enough to fuel a recession. And that could lead to a world of economic pain.

A scenario we shouldn't hope for -- even if it results in stimulus aid

Lawmakers have, in the past, turned to stimulus checks to boost the economy during prolonged slumps. In March of 2021, for example, the American Rescue Plan sent $1,400 stimulus checks into consumers' bank accounts, and it's those very checks that helped fuel inflation by giving the public money to spend at a time when supply chains were slowing down.

If the Fed's interest rate hikes drive a huge pullback in consumer spending, it could be enough to cause a recession. And if it's a bad recession, stimulus aid on the part of the federal government might come into play once more.

But for stimulus checks to go out again, we'd need to land in a pretty dire economic situation. And that's not something anyone should want.

The Fed might get its soft landing

The Fed's goal in raising interest rates is to cool inflation -- not spur a recession that hurts Americans in many ways. In fact, the whole reason the Fed wants inflation to shrink is that its job is to promote a healthy, stable economy. So the last thing the Fed wants is a broad downturn.

If the Fed gets its way, the result of its rate hikes will be a soft landing -- a modest pullback in consumer spending that cools inflation without sending the economy into a freefall. But that's a very delicate balance to strike. And since the central bank isn't done raising interest rates to fight inflation, we can't say with certainty that a recession won't hit in the near term -- and that stimulus checks aren't once again in Americans' future in some shape or form.