2024 Will Mark the End of the Post-Pandemic Economy

Economists did not believe it was possible, but they’ve been wrong a lot lately, and in their defense it has only ever happened once (or maybe twice) before: We may be witnessing that rare achievement known as a soft landing. The US Federal Reserve’s latest forecast expects the inflation rate to slide back down to 2% without much job loss or economic slowdown.

But before we celebrate this bravura monetary performance, or decide unemployment and growth aren’t sensitive to inflation or interest rates after all, allow me to offer two observations, one looking backward and one forward. First, the last few years have been highly unusual. Second, this year will mark the end of the free-lunch economy.

The post-pandemic economy was marked by several unlikely factors. Shortages coming out of the pandemic sparked inflation, which was then exacerbated by unnecessarily expansionary monetary and fiscal policy. Just as the economy was poised to recover, in other words, policymakers gave it rocket fuel.

All that stimulus money increased household savings. Savings-rich households kept spending, and firms desperate for workers faced an exceptionally tight labor market. Meanwhile the Fed not only pursued nominal zero rates, it tried to bring down longer term rates and mortgages — and did so well after the pandemic had ended.

The result was that even as rates increased, the economy stayed somewhat resilient. During the long period of low interest rates that preceded the post-pandemic, many firms, investors and households locked in low rates. Thus they were relatively unaffected by rising rates.