ADRIAN FLORIDO, HOST:
On your most recent trip to the grocery store or to the gas station, you've surely noticed what we all have - prices keep going up. Inflation is still climbing at a record pace in the U.S. And to try to stop that, the Federal Reserve has raised interest rates again this week - its biggest rate hike since 1994. The idea is that by making it more expensive to borrow money for a car or a house or to charge something to a credit card, Americans will start spending less, bringing down demand and prices. But many economists fear these aggressive rate hikes will slow the economy so much that we may be headed into a recession, which has many Americans wondering - should I be preparing for that? To help us make sense of where the U.S. economy is and how it might affect your life, we've called Teresa Ghilarducci. She's a professor of economics at The New School for Social Research in New York. Professor Ghilarducci, welcome back to the program.
TERESA GHILARDUCCI: Oh, it's really good to talk to you again, Adrian.
FLORIDO: The Federal Reserve says it's trying to engineer a soft landing to the economy - hiking interest rates just enough to bring down prices, without causing a full-blown recession. What's your sense of whether that's a realistic expectation?
GHILARDUCCI: Well, me, like the majority of economists in the United States and actually in most of the world, believe that they won't achieve it - that the Federal Reserve has set in motion a recession for next year. There was only one Fed governor that voted against it, Esther George from Kansas City, and she dissented because she said the rate hike was way too high, that it will cause a lot of construction to seize up, making the housing supply problem even worse. It will certainly stop people from buying on credit, but it also stops businesses from borrowing in order to expand and employ more people. So it's not just consumers that are affected by the interest rate hike. It's also businesses that need to borrow money to, basically, create jobs.
FLORIDO: Even if we aren't in a recession yet, a lot of people, you know, remember the Great Recession of 2008...
GHILARDUCCI: Yeah.
FLORIDO: ...And how tough it was for so many people. And they're wondering - should I be preparing? Teresa Ghilarducci, are you doing anything yet to prepare for a possible recession?
GHILARDUCCI: Right. It's really important for people to wonder what to expect when expecting a recession. I am. I have stopped my spending a bit. I don't click on Amazon as much, and I'm putting a lot of money in reserve - in emergency savings, you know, in my checking account. I'm just letting that build up a bit. I'm not planning the vacation that I was dreaming about in 2021.
I'm continuing to save in my retirement accounts to the maximum. You know, along with my emergency fund, I'm also saving in my retirement accounts. The low valuations in the stock market has not deterred me at all. In fact, I've been a little happier because buying stock now is a little bit cheaper. For people who are in lower incomes - these are people who are making, like, less than $34,000, which is actually a lot of people, or if you're in a married couple and your income is below 68,000 - you can get help from the federal government to save for your retirement - up to $1,000 to $2,000, depending upon your situation. It's called the saver's credit. So that's an encouragement for even the people who are most strapped by inflation now to still save for their retirement.
FLORIDO: I think a big question on a lot of people's minds is, you know, what should I be doing with my money first? How should I be prioritizing? Should I be saving first?
GHILARDUCCI: Yeah.
FLORIDO: Should I be using my money to pay down loans and credit cards since we probably expect interest rates to keep going up?
GHILARDUCCI: Yeah. So what people should do with their first dollar - you know, the paycheck you get, like, next week - is put about 5%, or 10% if you can, in emergency savings. Really plan as if you're going to lose 20% of your hours or that you may have a couple of months of unemployment, even, for you or your family member. So when you have that mindset - when you're expecting a recession, what you do with that first dollar is going to be very different. You don't have to pay off debt. Don't add to it. Certainly don't borrow any more because your interest rate's going to go up. Try to save for those emergencies first. The second use would be paying off debt, but that might be kind of a luxury right now.
FLORIDO: It's obviously a really uncertain time, with a lot of this talk of an impending recession. And, you know, it can be hard not to feel anxious.
GHILARDUCCI: Yeah.
FLORIDO: Is there anything we should know so as not to lose, maybe, too much sleep about this? Recessions don't last forever, right?
GHILARDUCCI: Yeah. Adrian, the best antidote to anxiety is information and control, and people do have a lot of choices and control and agency as they're expecting a recession and also handling the inflation they have right now. You can spend some time searching for bargains and switching from expensive items to cheaper items. That helps on the margin, but it helps enormously with your state of mind and being able to sleep. You're controlling that. And if you can, put in your mindset not anxiety, but reality that you might not have the bonuses and the income - or even lose some hours next year. Again, that gives you some control and peace of mind.
FLORIDO: What are you going to be paying attention to in the coming weeks and months to get a sense of where exactly the economy is headed?
GHILARDUCCI: Yeah, I'm going to be looking at bargaining power. I'm going to see if workers can actually get a wage increase to counter this inflation. And if they can't, I will predict weakening. So I like to look at not the unemployment rate, but expectations. If you ask for - the Federal Reserve has a survey about expectations. If you ask for a raise, would you get it? Are you thinking about quitting, or are you quitting? I'm looking at that.
I'm really looking at Congress to see if there is bipartisan support for some of the proposals coming from the White House, which are to control insulin prices. Now, that sounds odd, but insulin is taken by diabetics, and 30% of the population needs insulin. If we could actually bring down those costs, that could help.
I'm looking to see if Congress will help people on fixed incomes, people who are on TANF, people who are on food stamps - it's actually, again, a huge part of the population - to see if they will give them some relief. So I'm watching Congress. I think the Federal Reserve has learned its lesson from the loud chorus of economists that say, hang on on those rate increases - you know, slow down a bit on that. So I'll be looking at all things. I'll look at numbers, I'll look at politics, and then I'll look at the Federal Reserve.
FLORIDO: I've been speaking with Teresa Ghilarducci, professor of economics at the New School for Social Research in New York. Professor Ghilarducci, thank you so much for sharing your expertise with us.
GHILARDUCCI: Oh, thank you, Adrian. Transcript provided by NPR, Copyright NPR.