As worries of economic turmoil grow, experts and consumers alike are attempting to determine if the United States is on the verge of entering — or is already in — a recession.
According to a May report by the Federal Reserve, the war in Ukraine, rising interest rates, supply chain disruptions, and persistently high inflation — consumer prices rose 8.3 percent in April compared to the same period last year — are all weighing on the economy and could threaten the country’s financial stability.
According to the Fed, if inflation and increased interest rates start to take a severe toll on firms and people, the economy might witness an increase in delinquencies and bankruptcies. People may experience job losses, more interest payments, and decreased property prices when mortgage rates rise, dampening demand.
The Fed’s report isn’t a prediction; rather, it flags possible economic concerns. However, if the economy continues to deteriorate, the United States may face the dreaded “R” word: recession.
Recessions have a lengthy history in the United States.
According to the National Bureau of Economic Research, the United States has gone through 14 recessions since the Great Depression. Since 1929, recessions have lasted an average of 12.5 months, including the Great Depression. The COVID-19 pandemic recession of 2020 was the shortest, lasting only two months. The Great Depression of 1929, which lasted more than three years, was the greatest slump in history.
What function does the Federal Reserve play during a recession?
To keep the economy healthy, the Federal Reserve implements its monetary policy. What are the Fed’s main objectives? Promoting maximum employment, price stability, and long-term interest rates that are modest.
The Fed has a lot of instruments at its disposal to keep the economy functioning smoothly, including limiting the cost of borrowing money. The Fed may influence the economy by raising or reducing the federal funds rate, which is the interest rate for banks.
When inflation falls too low, the Federal Reserve would usually lower interest rates to assist revive the economy. When the nation was thrown into recession by the COVID-19 outbreak in 2020, the Fed sprang into action. The Fed was encouraging firms to invest and consumers to spend by decreasing borrowing rates.
When inflation is high, on the other hand, the Fed normally boosts interest rates to chill the economy. The Federal Reserve authorised a half-point interest rate boost in May to help curb inflation, which is at a 40-year high. The federal funds rate of the central bank was raised to a target range of 0.75 percent to 1% as a result.