The Fed averted a recession but left some people behind

The economy went through two separate phases of banking instability, one of which caused 5 banks to close last year. While mass layoffs have affected the lives of people in technology, advertising and media, according to Barron’s magazine. However, economists are optimistic about the strength of the economy and labor market in the near term. In May, the US labor force numbered 168 million people, of whom only 4%, or about 6.6 million, were unemployed, compared to 3.7% a year earlier. “We’re going through a kind of two-stage economy, where some people are doing well and some people aren’t,” Edward Yardeni, president of Yardeni Research, said in a webcast earlier this month.

One argument for overall economic resilience and some people’s well-being is strong federal spending, including increased Social Security, new health insurance subsidies, tax credits, and student loan forgiveness. In its latest forecast, the Congressional Budget Office revised its 2024 federal spending forecast to $6.8 trillion, 24.2% of GDP, up from 23.1% in February. Government spending is an expensive way to stimulate the economy, but its indirect impact on people’s wealth can be significant.

But spending is also a problem for the Fed. “We have a fiscal offset that I think helps support the economy, although it also supports the inflation rate,” Doug Ramsey, chief investment officer at Leuthold Group, said in a webcast last month. Other possible reasons for a two-part economy are the Federal Reserve’s balance sheet and rising interest rates on monetary instruments. The central bank buys more long-term Treasuries and mortgage debt securities in exchange for short-term debt. The weighted average maturity of the bank’s portfolio increased from 7.6 years during the peak of the pandemic to 8.8 years.

This, according to Barry Knapp, managing partner at Ironsides Economics, puts downward pressure on long-term interest rates and “encourages the misallocation of resources.” It also affects wealth because it allows people who have money to make more of it quickly, compared to when interest rates were zero during the pandemic. Estimates from the Federal Reserve showed that U.S. household net worth grew $5.1 trillion in the first quarter, a jump largely due to people’s increased holdings of stocks and mutual funds.

Fiscal stimulus and the Fed’s balance sheet have inadvertently led to an unequal distribution in the economy. Higher-wage workers have found ways to obtain additional sources of income, an outcome that conflicts with the Fed’s goal of slowing demand, and leaves groups of people lagging behind others.