As economic traumas go, the recovery from the 2020-2023 period of high inflation was unconventional, in that as inflation abated, the usual offset of higher unemployment, job losses and negative gross domestic product growth never materialized. Pre-pandemic, supply chain issues and increased consumer demand induced by government and consumer debt resulted in the June 2022 inflation rate of 9.1%. Prior economic traumas were often viewed through the lens of the Great Depression. During this time in American history, a stagnant employment base resulted in diminished demand for goods and services and a period of decreasing GDP, and high inflation and unemployment.
While both economic periods were impacted by the instability of consumer demand, the time frame between 2020 and 2023 was impacted by the federal debt funded 2021 American Rescue Plan and 2022 Inflation Reduction Act, which injected $4.6 trillion into an already rebounding economy. This caused consumer demand to rapidly rise, sustaining the record high inflation, job growth and low unemployment, It also increased the nation’s money supply from $16.997 trillion in April 2020 to $21.562 trillion in June of 2022. As of October 2023, the money supply had fallen to $20.725 trillion.
Simply stated, there were too many dollars chasing too few goods. To curb inflation, the Fed had to remove those funds from the economy, and did so by raising interest rates 11 times since March 2022 to a 22-year high of 5.4%.
As we enter 2024, the higher interest rates and improved supply chains brought inflation from 9.1% to 3.4% in December 2023, and is approaching the Fed’s 2% target. However, the anomaly is the inflation reduction came without the expected reduction in demand, higher unemployment, higher job losses and decreasing GDP. Sustaining the economy—and the current 3.1% GDP growth—was the increased money supply, higher wages, lower unemployment and the record household debt of more than $17 trillion; this also includes $1.1. trillion of credit card debt.
It is likely those trends will continue in 2024.
So far, despite all the debt-fueled economic activity, the Fed’s approach to curbing inflation is receiving positive results. It wants a soft landing, which translates to price stability without higher unemployment. The current 3.7% unemployment rate is below the Fed’s target unemployment rate of 4.4%, which includes employer posted job openings of 9 million, down from 12 million in March 2022. And while job creation continues—especially in state and local governments—the hires of 5.6 million haven’t changed much, as did the 5.4 million resignations and layoffs. However, as job reductions are anticipated at Citibank, UPS and Jet Blue, the economy appears to be cooling.
Clearly, the once feared recession and accompanying job losses that most thought was necessary to reduce inflation leaves the Fed with a balancing act of when to begin lowering interest rates. Too soon could overheat the economy and cause a re-emergence of rising inflation. Waiting too long could delay real economic growth. If falling inflation trends continue, interest rate reductions should occur toward the end of 2024.
To recall, before all the government and consumer debt-fueled consumer spending, the pre-pandemic economy had a 2% growth in GDP with a 1.4% inflation rate and a federal funds rate of .25%. Just what the Fed is looking for.
Martin Cantor is director of the Long Island Center for Socio-Economic Policy and former Suffolk County economic development commissioner. He can be reached at [email protected].