The economy has had a rough few weeks. With the debt ceiling crisis, the downgrade of the U.S. credit rating and the resignation of Apple CEO Steve Jobs, the stock market has been even more uncertain than usual. So, when Federal Reserve chairman Ben Bernanke made a speech on Friday about the state of the economy, the nation paid attention.
What You Need to Know
- Bernanke admitted that the financial crisis that began in 2008 was “more severe than any since the Great Depression” and the recovery has “proved disappointing so far.”
- But he expressed confidence in the recovery and said that the nation’s long-term financial future remains strong.
- In an unprecedented move, Bernanke pointed a finger at policymakers in the government. He said that the out of control debt ceiling debate caused a steep fall in the stock market and the downgrade of the U.S. credit rating from Standard & Poor’s. (Here’s the scoop on the downgrade.)
- He did not indicate that the Fed plans to take any new actions to help the economy.
Investors had been expecting—and hoping—that Bernanke’s speech would be more similar to the one he gave one year ago, in which he announced that the Fed would pump $600 billion into the economy.
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Markets reacted to this news—and Bernanke’s cautious optimism—by jumping 1% on Friday morning.
What This Means for You
It’s normal to be intimidated by the sharp rises and losses of the past couple of weeks, but keep reminding yourself that even the losses don’t indicate some apocalyptic tableau—there are a number of financial things you can do to make the most of an uncertain situation.
- If you’re feeling nervous (unemployment is high, the stock market is rocky), buff up your emergency fund. We generally recommend saving six to nine months of living expenses, but if you’re on edge about your job stability or the future in general, go ahead and save a full nine months—not only is it good to have, but it’ll also give you extra peace of mind.
- Once you have a fully-stocked emergency fund, take a deep breath and don’t panic. You’ve taken the necessary steps to protect yourself in case of an emergency, so now you can stop thinking about the potential for calamity. The economy needs financially-secure individuals like you to regain confidence and start spending. Bernanke even said that low household confidence will “pose ongoing risks to growth.”
- It’s human nature to buy high and sell low, but remember that investing should always be a long-term process. Heed Bernanke’s words of encouragement about the U.S. economy’s long-term prospects—and avoid getting spooked into selling your investments, even if others panic.
If anything, we’re a little heartened by Bernanke’s emphasis on the role of politicians in the current market crash: After all of the criticism being lobbed at politicians over the way that the debt ceiling debate shook out, we hope that they’ll revisit the way they handle important questions of economic policy in the future.
For more on how to save for the perfect emergency fund, read this.
Ready to start investing because you think the market is at a low? Check out our Build Your Wealth course to learn what you need to know.
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Image: Flickr/Medill DC