Hangovers from the GFC and Covid

The US economy is still dealing with the lingering effects of the 2008 Global Financial Crisis and the 2020 COVID-19 pandemic response. These events led to unprecedented fiscal and monetary stimulus, ballooning national debt to over 100% of GDP and establishing a prolonged period of low interest rates. New Fed Chair Warsh is reportedly looking to move away from post-2008 communication strategies, but shrinking the Fed's balance sheet may prove challenging given current bond market strains.

Unsustainable annual deficits persist, exacerbated by a declining labor force due to lower immigration and retiring Baby Boomers. This makes productivity growth, potentially from AI, essential for economic expansion. Consumers, despite solid employment, exhibit depressed sentiment due to political polarization. The housing market faces an affordability crisis, with locked-in low mortgage rates discouraging sales and keeping prices high.

The only clear beneficiaries of these policies appear to be Baby Boomers, who hold a disproportionate amount of wealth and continue to spend, supporting the economy. Watch for how Chair Warsh navigates the Fed's balance sheet reduction and whether productivity gains materialize to offset the shrinking workforce. The housing market's affordability issue remains a significant unresolved problem.