Stimulus Update: Will the Fed's Latest Rate Hike Fuel a Recession That Leads to Stimulus Check?

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  • Despite inflation levels dropping, the Federal Reserve raised its benchmark interest rate at its last meeting.
  • If higher rates fuel a pullback in spending, it could cause a broad economic decline, forcing lawmakers to come to Americans' rescue.

Higher borrowing costs for consumers could have negative results.

Inflation has been hammering consumers since the latter part of 2021. And over the past year and a half, many people have been forced to charge up a storm on their credit cards and raid their savings accounts just to keep up with rising costs.

The Federal Reserve is really eager to see the problem of inflation go away. And to that end, it's been aggressively hiking up interest rates this year in an effort to cause a pullback in consumer spending.

To be clear, the Fed doesn't set consumer borrowing rates, like auto loan and mortgage rates. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing.

But when the Fed raises its benchmark rate, consumer borrowing rates tend to follow suit. And so these days, consumers are looking at higher interest rates on everything from personal loans to credit card balances.

Now the goal in making borrowing more expensive is to drive a modest decline in spending so that the supply of goods and services can catch up to demand. Once that happens, it should help bring inflation down to a more moderate level.

But the Fed is taking a big risk. If consumer spending declines drastically, it could be enough to spur a full-blown recession.

Meanwhile, in November, the Consumer Price Index, which measures changes in the cost of consumer goods, showed a slowdown in inflation compared to earlier on in the year. In spite of that, the Fed announced a 0.50% interest rate hike on Dec. 14. And while that won't lead to an instant recession, it could bring us closer.

Things could take a turn for the worse

So far, higher borrowing costs don't seem to be slowing consumers down to too much of an extreme. But some experts think a big reason we haven't seen a notable decline in spending is that Americans still have leftover stimulus funds to spend from 2020 and 2021. Once that money runs out, spending could drop to a large degree.

If that happens, it could be enough to cause a recession to hit in 2023. And at that point, the topic of stimulus aid might re-enter the mix.

Lawmakers have previously relied on stimulus aid to bust the economy of a slump. And so if things get really bad for the economy in 2023, Americans could see another round of stimulus checks land in their bank accounts.

Lawmakers might be stingy

Although a 2023 recession could lead to a round of stimulus funding, the last batch of stimulus aid given out was met with a lot of criticism. In fact, many experts believe that it was lawmakers' generous stimulus policies in 2020 and 2021 that led to such rampant inflation in the first place.

If a recession strikes in 2023, stimulus checks could be back on the table. But they may be a lot more limited in size and scope than in previous years. And so all told, stimulus aid is not something the typical consumer should rely on in the near term -- even if economic conditions decline.

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