After too much easy cash, is recession a question of time?
At the beginning of the COVID-19 pandemic, the Fed cut interest rates to zero, trying to encourage as much consumption as possible at a time of unprecedented uncertainty. The cheap credit also helped employers keep their businesses running.
On top of that, the Trump administration provided generous stimulus checks to most Americans, which the Biden administration doubled down on, adding more stimulus checks and ramping up government spending, printing trillions of new dollars. People rushed to buy everything from new phones to new cars. (Remember last year, when it was almost impossible to buy even a used car?)
However, the combination of “cheap money,” expensive government stimulus, and broken supply chains (including chaos at the ports) created a spike in demand for goods. The result: 8.6 percent inflation, the most in 40 years.
Now the Federal Reserve faces the dilemma of how to raise interest rates — which will curb demand for goods and bring prices down — without causing consumption to crash, which lead to businesses closing and massive layoffs. Fed chairman Jerome Powell has no easy choices.
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