The 2020 recession generated the highest inflation since the 1970s.
However, the 2020 recession was the shortest.
Furthermore, the recovery was the fastest since the 19080s.
As the economy reopens amid disruptions caused by the pandemic, the next phase of the economy could slow down unexpectedly.
What are the three reasons that could slow down the economy unexpectedly?
The remarkable fiscal and monetary stimulus-response increased demand in 2020 and 2021.
The fiscal policy offered enhanced unemployment insurance, expanded child tax credit, stimulus checks, and forgivable business loans.
Furthermore, as per Hutchins Center on Fiscal and Monetary Policy, in the first quarter of 2021, fiscal support provided 7.6% points to inflation-adjusted gross domestic product.
However, they subtracted 2.1 points in the first quarter of this year.
Nevertheless, as personal incomes enjoyed by government transfers slowly end, earnings and employment rates are soaring rapidly.
The second reason the economy could slow down unexpectedly…
Rising gas prices are hindering purchasing power while contributing to inflation.
The last three months witnessed a 10% increase in wage income, which dipped 1.2% when adjusted for inflation.
However, pressure may ease if gasoline prices reduce in the coming months.
The third reason the economy could slow down unexpectedly…
In 2020 the Federal Reserve slashed rates to nearly zero.
As the pandemic hit in 2020, the Federal Reserve bought bonds worth trillions of dollars.
However, since December 2021, the Federal Reserve has been trying to turn the low-interest rates.
The two-year Treasury yield expects the Fed to raise interests rates as low as 2.4%.
However, the 2% point rise is the highest since 1994.
On Wednesday, the Mortgage Bankers Association reported the 3–year mortgage rate soared to 5.13%.
Furthermore, in February, The National Association of Realtors’ housing affordability index was at a 13-year low.
Additionally, predicting the effects of the reasons mentioned above may not be easy.
Good generated the unusual nature of this economic cycle and the rise in demand and inflation in the last two years.
While the economy is on the path to recovery, it may slow down unexpectedly.
Nevertheless, economic recovery is bound to happen.