Stimulus Update: Will Interest Rate Hikes Drive Us Into a Near-Term Recession?

It's a possibility we can't dismiss.

It's fair to say that inflation has been out of control for well over a year now. And even workers who have seen their earnings go up over the past year are feeling squeezed.

The Federal Reserve, meanwhile, is on a mission to cool inflation. And it's attempting to do so by aggressively raising interest rates.

Specifically, the Fed just raised its benchmark interest rate by 0.75% for the third time in a row. And if it continues to do so, we could end up in a rough economic spot.

To be clear, the Fed has the best of intentions. It's not a secret that consumers across the country are consistently racking up credit card debt and raiding their savings just to stay afloat. But if the Fed doesn't slow things down, we could end up with a near-term economic recession on our hands. And at that point, a lot of people might see their personal financial situations decline rather than improve.

Why aggressive interest rate hikes could fuel a recession

The reason inflation has been soaring has to do with a disconnect between supply and demand. Last year, Americans were privy to a number of financial windfalls -- stimulus checks and monthly Child Tax Credit payments -- at a time when supply chains were slowing down due to the pandemic. As such, there weren't enough goods to go around to meet consumer demand. And any time you have that sort of gap, prices tend to go up.

Here's where interest rate hikes come into play. Though the Fed doesn't directly set consumer borrowing rates, when its raises its federal funds rate (the rate banks charge each other for short-term borrowing), the cost of borrowing via loans and credit cards tends to rise. And while that's a bad thing to some degree, it could also lead to less consumer spending, thereby bridging the aforementioned gap between supply and demand and bringing living costs downward.

Now the danger in the Fed's actions is that consumer spending could start to decline to a major degree instead of a moderate one. If that happens, it could be enough to spur a recession. And a recession could, in turn, mean widespread job loss and worlds of financial heartache for a lot of people.

Will stimulus checks get approved if a recession hits?

Stimulus checks aren't going to solve the problem of inflation. If anything, they might drive living costs upward even more. But if a recession hits, it's fair to assume that stimulus checks could come back into play.

The federal government has a history of approving stimulus payments during periods of widespread economic distress. And so if a recession comes to be and it's a real doozy, there's a chance lawmakers will approve a stimulus round to pump money into the economy and break that cycle.

Now at this point, the idea of another stimulus check is really just speculative, especially since we can't say for sure that we're doomed to a prolonged economic recession. At the same time, we can't discount the possibility that things are about to take a turn for the worse. And if stimulus checks are the silver lining that keep us calm in light of recession fears, so be it.