There’s a lot of uncertainty surrounding the economy, real estate market, and the role of inflation in the economic environment.
When it comes to inflation, it’s important to identify how we got here. By here, I mean on the verge of an economic downturn with near record high inflation.
The Cyclical Nature of the Economy
Our economy is cyclical. It goes up. It goes down. And repeats. If you’re familiar with historical economic cycles in the United States, it should be no surprise that after a nine-year bull run, things were poised to peak back in 2019 and 2020. That nine-year run was historically long and, in many ways, driven by the fact that inflation was low for most of the decade.
Typically, a cycle results in a downturn after economic growth leads to inflation, triggering the Federal Reserve to raise interest rates. A rise in interest rates makes it more costly to borrow and more beneficial to save, so people stop spending, start saving, and the economy slows down, which alleviates inflation.
But we weren’t seeing much inflation, so interest rates stayed relatively steady for much of the decade, and things kept chugging along. Who knows for how long they might have kept going. Then the pandemic happened.
The economy came to a screeching halt, and it looked like we were on the verge of an economic depression. So the Fed stepped in again.
The Fed controls interest rates and the money supply. They use these two things to manipulate the economy in an attempt to avoid large swings or catastrophic events. At least that’s the goal.
Unfortunately, when it comes to avoiding economic risk, the Fed historically over-corrects. They move too much or too quickly. That’s exactly what happened here. COVID-19 caused panic over what could become an economic catastrophe, and the Fed reacted by over-correcting.
They lowered rates excessively and quickly, released a bunch of new money into…