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A new report released by Federal Reserve (Fed) economists Francois de Soyres, Dylan Moore, and Julio Ortiz notes that savings accumulated during the Covid-19 pandemic in US households decreased during the last two years.
According to the analysis, the inflation that has affected millions of households this year caused those same “excess savings” to be depleted in the first quarter. During the pandemic, these same families received stimulus checks and social assistance, in addition to the pause on student loans, which generated more financial peace of mind.
According to the specialists who addressed the study, they stated that “in order to mitigate the health and economic consequences of the COVID-19 pandemic, governments around the world committed to large fiscal support programs that increased the demand for consumer goods, but the production of these goods did not adjust fast enough to meet the strong increase in demand”, they indicated.
“Excess Savings” Boosted Demand
Therefore, they highlighted that that same excess saving was partly what caused the increase in inflation through excessive consumer spending, but as that saving decreased, economic demand was boosted. “Given the faster reduction of excess savings, it is likely that aggregate demand in the United States was generated more than in other countries over the past year,” they said.
The Fed economists detailed that this excess saving was exhausted in about 10 quarters, since after leaving the pandemic the problems in the supply chain did not wait, drastically increasing prices and triggering inflation to one of its maximums. in June of last year when it stood at 9.1%, the highest level in 40 years.
This caused the Federal Reserve to implement several monetary policies, among them the rise in interest rates to curb consumption and with it inflation, so far the Fed has made 10 increases in 15 months. The last rise was at 5.25%, with inflation at 4%, twice its target.
Interest rates will rise twice as much
Although it was decided to pause, it is expected that this year there will be two more increases in interest rates, according to Fed Chairman Jerome Powell, who recently indicated that the course has not been easy “inflationary pressures remain high , and the process of bringing inflation back to 2% has a long way to go,” he said in his last speech.
This decision was supported by the Open Market Committee (FOMC) last month when they announced that “most participants noted that in their economic projections they judged that additional increases in the federal funds rate target during 2023 would be appropriate“.
The economic forecast for this year by the FOMC is the tightening of credit conditions for both US households and companies, it is expected that with these actions a mild recession will be conducted at the end of this year, in the midst of financial conditions already strict after the fall of three major banking entities, however the economic recovery for next year is expected to advance moderately.
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