What Happens to Interest Rates During a Recession? - SmartAsset (2024)

What Happens to Interest Rates During a Recession? - SmartAsset (1)

A shrinking economy can affect you financially on a number of levels. One big question you might have is what happens to interest rates during a recession? Ordinarily, interest rates dip in the early stages of a recession in order to spur spending and borrowing. Lower rates can be a good thing if you need to take out loans but they can adversely affect how quickly your money in a savings account or CD account grows.

A financial advisor can help you make smart investments during a recession.

What Is a Recession?

A recession is marked by a period of economic decline. The technical definition is at least two consecutive quarters of negative economic growth as measured bygross domestic product (GDP). Often, though, the term recession is used more broadly than that technical definition. For example, the National Bureau of Economic Research (NBER) characterizes recessions as a significant economic decline that lasts more than a few months.

When recessions happen, unemployment tends to increase as economic production and output slows. Companies lay off employees in order to preserve profit margins. Meanwhile, those who have been laid off tend to conserve funds and spend less on discretionary purchases, like travel or new cars.

Recessions are part of the economic cycle. In this cycle, you have periods of expansion when the economy is booming. Eventually, the expansion period peaks and a period of contraction begins. This is when you get a recession. There’s a trough where the economy hits its lowest point before the cycle begins again with another expansion period.

What Causes Recessions?

There’s no single cause that drives recessions. They can be triggered by a number of circ*mstances and there’s no way to accurately predict exactly when a recession will begin. Seven common causes of recessions include:

  • Geopolitical events that increase stock market volatility
  • Global pandemics
  • Natural disasters that deliver a large-scale economic shock
  • Sharp drops in consumption and demand
  • Faltering confidence in the markets and economy
  • Market bubbles
  • High interest rates

Whether a recession is short-lived or not typically depends on the factors that lead up to it. The Great Recession, for example, lasted for approximately 18 months. That recession was largely triggered by the subprime mortgage market crisis, which lead to a housing market crash. How long a recession lasts is different for each one.

What Happens to Interest Rates During a Recession?

What Happens to Interest Rates During a Recession? - SmartAsset (2)

The Federal Reserve uses monetary policy to steer interest rates during recessionary periods. When a recession sets in, the Fed may reduce the federal funds rate in order to spur economic growth. The federal funds rate is the rate at which banks lend money to one another overnight.

When the federal funds rate drops, banks and lenders typically adjust interest rates for loans accordingly. That means loans and lines of credit become less expensive to borrowers. The idea behind this strategy is that if credit is more accessible, more people will borrow. As they spend what they borrow, they funnel money back into the economy to help pull it out of a recession.

While lower rates on loans are a boon for consumers, there is a downside. As rates drop, banks can also cut back on the interest they pay to savers. So you’ll typically see lower rates for deposit accounts, including savings accounts, CD accounts and money market accounts, during a recession. That’s a disadvantage if you’re hoping to grow your money at a great rate.

Rates drops are more common in the early stages of a recession. As the economy begins to pick up, the Federal Reserve may adjust its interest rate policy. Once the economy begins to approach the peak of an expansion period, the Fed may raise rates in order to curb borrowing and spending. This is usually done to prevent the economy from overheating.

How to Navigate Interest Rates During a Recession

The most important thing to remember about what happens to interest rates during a recession is that they’re fluid. Where rates are at the beginning of a recession are not an exact indicator of where they’ll be once a recession ends.

With that in mind, here are three strategies for managing a changing rate environment during a recession:

  • Consider changing banks. If you have money in savings accounts, CDs or money market accounts, switching banks could be a good move if a recession is looming. Moving to an online bank, for example, could allow you to get a higher interest rate and APY on savings balances. Online banks have lower overhead costs than traditional banks and can pass that savings on to their customers.
  • Weigh the benefits of refinancing. Mortgage rate movements are not directly affected by changes to the federal funds rate. Instead, they’re tied to the Treasury yield curve. If mortgage rates go down during a recession, that could be a good time to score a better deal on your mortgage. Just consider what you might pay in closing costs and how long it’ll take you to break even to recoup any savings with a lower rate before refinancing.
  • Consolidate other debts. If you have high-interest debt, a recession could be a good time to consider consolidating them with a low-interest personal loan. You could also try a 0% balance transfer credit card offer if you qualify for one. If you have student loans, refinancing them to a new loan with a lower rate is another possibility for saving money.

Also, consider how a recession might impact your portfolio. If the market is experiencing increased volatility, for instance, that could cause the value of your stock allocation to drop. Bonds are generally a safe haven, though changing interest rates can affect which maturities are the best investments during a recession.

You might add some recession-proof investments for diversification to offset any negative impacts of a downturn. Real estate, for example, has a low correlation to the stock market and is considered to be a good hedge against recessions and inflation as people still need housing. You don’t necessarily need to buy rental property to invest in real estate in a recession either. Other investment options include real estate mutual funds and exchange-traded funds, real estate investment trusts (REITs) and real estate crowdfunding.

Bottom Line

What Happens to Interest Rates During a Recession? - SmartAsset (3)

Recessions are unpleasant to say the least, but they’re a natural part of the economic cycle. Knowing what happens to interest rates during a recession and how to spot the signs of an impending downturn can help you to fine-tune your financial strategy to minimize potentially negative impacts.

Investing Tips

  • Consider talking to your financial advisor about how to manage your investments and overall financial situation when a recession appears to be on the horizon. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • When a recession is accompanied by high unemployment and rising consumer prices, the end result is stagflation. While stagflation is relatively rare, it can and has happened in the U.S. economy. Learning some strategies for investing during stagflation, such as adding Treasury Inflation Protected Securities (TIPS) to your portfolio, can make it easier to weather this type of economic event should it occur.

Photo credit:©iStock.com/elenaleonova, ©iStock.com/Pekic, ©iStock.com/Cemile Bingol

What Happens to Interest Rates During a Recession? - SmartAsset (2024)


What Happens to Interest Rates During a Recession? - SmartAsset? ›

Rates drops are more common in the early stages of a recession. As the economy begins to pick up, the Federal Reserve may adjust its interest rate policy. Once the economy begins to approach the peak of an expansion period, the Fed may raise rates in order to curb borrowing and spending.

Do interest rates go up or down during a recession? ›

Interest rates usually fall in a recession as loan demand declines, investors seek safety, and consumers reduce spending. A central bank can lower short-term interest rates and buy assets during a downturn to stimulate spending.

What happens to interest rates during the Great Recession? ›

As the financial crisis and the economic contraction intensified in the fall of 2008, the FOMC accelerated its interest rate cuts, taking the rate to its effective floor – a target range of 0 to 25 basis points – by the end of the year.

Do CD rates go up during a recession? ›

Because CD rates follow the federal funds rate, CD rates will usually go down during a recession.

Is it better to have cash or property in a recession? ›

Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.

What gets cheaper during a recession? ›

Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.

Is it good to buy property in a recession? ›

This decreased demand means less competition for homes on the market, which in turn means sellers who are more open to lowering their prices. So buying during a recession, if you are financially able to, may get you a better deal.

Are CD's safe in a recession? ›

CDs are primarily a safe investment. They are guaranteed by the bank to return the principal and interest earned at maturity. CDs can provide modest income during turbulent economic times like recessions when other types of investments often lose value.

What will interest rates look like in 5 years? ›

ING's interest rate predictions indicate 2024 rates starting at 4%, with subsequent cuts to 3.75% in the second quarter. Then, 3.5% in the third, and 3.25% in the final quarter of 2024. In 2025, ING predicts a further decline to 3%.

What was the worst recession in history? ›

In the United States, the Great Recession was a severe financial crisis combined with a deep recession. While the recession officially lasted from December 2007 to June 2009, it took many years for the economy to recover to pre-crisis levels of employment and output.

Where can I get 7% interest on my money? ›

7% Interest Savings Accounts: What You Need To Know
  • As of May 2024, no banks are offering 7% interest rates on savings accounts.
  • Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.

What is the best CD rate for $100,000? ›

Best Jumbo CD Rates for May 2024
CD Bank5.20% APY$100,000
Luana Savings Bank4.42% APY$100,000
All In Credit Union4.13% APY$100,000
Best non-Jumbo option: MutualOne Bank5.65% APY$500
46 more rows

How high will CDs go in 2024? ›

Key takeaways. The national average rate for one-year CD rates will be at 1.15 percent APY by the end of 2024, McBride forecasts, while predicting top-yielding one-year CDs to pay a significantly higher rate of 4.25 percent APY at that time.

Where is your money safest during a recession? ›

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.

Can you lose money in a savings account during a recession? ›

Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution. What happens if my bank fails during a recession?

What do people buy most during a recession? ›

Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand. Offering these types of items can position your business as a vital resource for consumers during tough times. People want to look good, even when times are tough.

Will mortgage rates go down in a recession? ›

The pattern is clear: during every recession, the economy slows, inflation comes down, and mortgage rates decline.

Who benefits in a recession? ›

Lower prices — A recession often hits after a long period of sky-high consumer prices. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.

Is it bad to buy a house before a recession? ›

However, it is difficult to time the market. Therefore, you might buy a home at a great price, but the home you buy may be worth less before the recession ends. Risk of Foreclosure – During recessions job losses increase. If you lose your job or have a reduction in income you may not be able to afford the payment.

What will cause interest rates to drop? ›

Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them. An increase in the amount of money made available to borrowers increases the supply of credit. For example, when you open a bank account, you are lending money to the bank.

Top Articles
Latest Posts
Article information

Author: Greg Kuvalis

Last Updated:

Views: 6415

Rating: 4.4 / 5 (75 voted)

Reviews: 82% of readers found this page helpful

Author information

Name: Greg Kuvalis

Birthday: 1996-12-20

Address: 53157 Trantow Inlet, Townemouth, FL 92564-0267

Phone: +68218650356656

Job: IT Representative

Hobby: Knitting, Amateur radio, Skiing, Running, Mountain biking, Slacklining, Electronics

Introduction: My name is Greg Kuvalis, I am a witty, spotless, beautiful, charming, delightful, thankful, beautiful person who loves writing and wants to share my knowledge and understanding with you.