Let’s talk about a scenario where the Federal Reserve (Fed) might not be the middle class’s best friend. It’s a tough pill to swallow, but sometimes, we need to consider the worst-case scenarios to make the best decisions.
The Fed seems more concerned about its reputation than the wellbeing of the middle class. The Fed’s governors, who are all wealthy, would be just fine even if the economy took a nosedive. To them, the economy is just a bunch of numbers, not real people.
We’ve heard warnings about potential economic disaster if the Fed Funds rate exceeds 5% and stays there despite slowing inflation. Yet, on May 3, 2023, the Fed hiked the rate by another 0.25% to a range of 5% – 5.25%.
The last time we saw these rates was in 2007, right before the 2008 global financial crisis that affected millions. But let’s try to find the silver lining in this cloud.
The Upside of a Fed-Induced Recession
I’d rather see a thriving middle class and a bull market, but given the circumstances, let’s try to find some positives. With the Fed Funds rate at 5% – 5.25%, we could expect more bank closures, layoffs, and a significant slowdown in GDP growth. We might lose up to two million jobs over the next year.
-
Less Focus on Prestige and Money: When you’re struggling financially, you’re more focused on survival than status. This shift in focus could lead to a healthier perspective on what truly matters in life.
-
Improvement in the Student Loan Crisis: With middle-class incomes at risk, parents and students might opt for more affordable colleges or trade schools. This could lead to a better alignment between the cost of education and its benefits.
-
Better Financial Habits: Financial hardship often forces people to be more frugal and improve their financial habits. This could lead to better financial health in the long run.
-
Environmental Benefits: With fewer cars on the road, we could see less pollution and traffic.
-
Opportunity for a Fresh Start: Job loss could provide an opportunity to try something new and potentially more fulfilling.
-
Less Overcrowding in Schools: With fewer students, schools could become less crowded, leading to a better learning environment.
-
Stronger Relationships: Financial hardship often brings people closer together, strengthening relationships.
-
Focus on Health: Losing a job could provide an opportunity to focus on improving physical and mental health.
-
Political Change: Economic hardship often leads to political change, which could lead to new ideas and compromises.
-
Lower Borrowing Costs: In times of economic calamity, borrowing costs often decrease, which could be beneficial for the middle class.
-
Decline in Inflation: A beaten-up middle class could lead to a decline in inflation, which is ultimately what the Fed wants.
-
Easier to Generate Passive Income: Higher rates make it easier to generate passive income, which could help people retire earlier.
While being part of the middle class is great, it’s even better to be slightly above it, in the "mass affluent" class. This means having an above-average net worth and income for your age. With this extra cushion, you can weather economic downturns better and take advantage of opportunities that arise.
So, let’s hope the Fed Funds rate doesn’t go any higher. But if it does, we need to be prepared for the worst.
What other positives can you think of if the Fed decimates the middle class? Let’s try to find as many as we can.
And remember, even in tough times, there are always opportunities. Whether it’s investing in real estate, picking up a new book, or signing up for a newsletter, there’s always something you can do to improve your situation.
