The Fed Expects a Mild Recession This Year. Here's What That Could Look Like

It's hardly a secret that it's gotten very expensive to borrow money, whether in the form of a credit card balance, personal loan, or mortgage. And the reason is that the Federal Reserve has been hiking up interest rates in an effort to slow the pace of inflation.

The problem, though, is that costly borrowing has the potential to fuel a recession. If consumers get fed up with sky-high borrowing costs, they're apt to start spending less. That has the potential to impact the economy in a negative way.

In fact, the Federal Reserve itself has acknowledged that a mild recession is likely in 2023. But what exactly might that entail?

Without a crystal ball, we can't say for sure. But here's what a mild recession might do to the economy.

Unemployment numbers could rise, but not drastically

A major recession has the potential to upend the economy and drive unemployment levels upward in a very big way. But a mild recession might lead to just a modest uptick in unemployment.

Of course, that's not a great thing for the people who might find their jobs on the chopping block. But if unemployment doesn't rise all that much, it means that those who find themselves out of work might have an easier time getting hired elsewhere.

From a stimulus perspective, a mild recession is unlikely to lead to another round of federal aid. Lawmakers have approved stimulus checks in the past during periods of raging unemployment. A mild recession is unlikely to get us to that point, which means Americans should not expect to see a windfall hit their checking accounts.

Stock values could fall -- or not

A mild recession could impact stock values, but that's not guaranteed to happen. In 2020, when unemployment levels were astronomical, the stock market, after a temporary dip, had a really strong year. So recessions and stock market downturns don't always go hand in hand.

Still, it's a good idea to make sure your investments are diversified. That way, if the stock market does experience its share of volatility, you may be less likely to face major losses.

And remember, too, that you don't officially lose money on stocks until you actually sell them at a lower price than what you paid for them. So if you load your savings account with plenty of cash, you may not have to liquidate your stocks at a loss when a need for money arises.

The housing market could hold steady

A mild recession could lead to a decline in home buyer demand. But home values are unlikely to drop for one big reason: The market today sorely lacks inventory on a national level.

As of the end of April, there was only a 2.9-month supply of available homes, according to the National Association of Realtors. It can easily take a 6-month supply to fully satisfy buyer demand.

Even if the supply-demand gap narrows during a mild recession, we're unlikely to see demand outpace housing supply because of where inventory is at today. So all told, prospective home sellers don't necessarily need to panic.

A mild recession might only cause a fraction of the damage that a full-blown recession has the potential to produce. But it's still a good idea to prepare for a downturn nonetheless. You can do so by shoring up your savings, paying off high-interest debt, and boosting your job skills so that your employer might have a harder time letting you go should money get tight.