Stimulus Update: Federal Reserve Warns a Light Recession Is Likely

For much of 2022, financial experts were warning consumers to brace for a 2023 recession. The logic was that interest rate hikes on the part of the Federal Reserve were apt to lead to a broad pullback in spending. And that alone had the potential to drive the economy into a downward spiral.

So far, the economy has been resilient. But a combination of rate hikes and the recent banking industry crisis have the potential to fuel a mild recession later on in 2023, the Federal Reserve recently acknowledged. And that's a scenario worth preparing for.

How to gear up for a recession

Economic recessions can take on different forms, and a mild one may not be so painful or prolonged. But it's important to prepare for a recession nonetheless, and one of the best ways to do so is to build a solid emergency fund.

At a minimum, you should aim to have enough money in your savings account to cover three months full of essential expenses. That way, if you were to lose your job, you'd have cash reserves to fall back on during a subsequent job search. And, ideally, you wouldn't have to rack up immediate debt on your credit cards just to stay afloat.

In addition to shoring up your savings, it's a good idea to work on chipping away at existing high-interest debt, such as a credit card balance you might still have. If you lose your job during a recession, the last thing you'll want is extra financial obligations to deal with.

Finally, it could be a good idea to secure a backup income stream in case you wind up falling victim to layoffs at your place of work. The good news is that the gig economy remains strong, so there may be plenty of options for you to pursue. A side gig could not only make it easiest to boost your savings and pay off lingering debt, but also, it's something you can potentially ramp up on should that need arise.

Will a mild recession lead to another round of stimulus checks?

The last time lawmakers approved a round of stimulus checks was March of 2021 as part of the American Rescue Plan. Back then, unemployment was very high and many people could not return to a job due to health concerns. If a mild recession hits later on in 2023, it's unlikely that lawmakers will move forward with federal stimulus aid.

For one thing, the situation may not become dire enough to warrant it. Also, lawmakers did face their share of criticism the last time they were generous with stimulus aid.

In fact, some financial experts point to generous pandemic-era stimulus policies as the reason inflation has been surging since mid-2021. So it's pretty fair to assume that lawmakers will opt to err on the side of caution with stimulus funds this time around.

Of course, if the economy takes a drastic turn for the worse, that's a different story. But that's also a scenario no one should hope for, even if it would, in theory, make a follow-up stimulus round more likely.