Wall Street appears to have bounced back after two and a half years of high inflation and speculative worries about a recession. The S&P 500 (a stock market index tracking the stock performance of the top 500 publicly traded companies) rallied 1.2% to 4,839.81, surpassing its record of 4,796.56 in 2022. Within that period, the S&P dropped 25% at the peak of inflation. Gross Domestic Product, adjusted for inflation, showed a 3.3% increase in the fourth quarter of 2023, blowing the Federal Reserve’s forecasted rate of 1.5% out of the water.

The Fed was steadily hiking interest rates from March 2022 through December 2023, bringing its main interest rate from almost zero to a range of 5.25% to 5.50%. These rates have been the main strategy for reducing inflation, making borrowing more expensive alongside hurting stocks and other investments in an effort to cool the economy off.

The long-sought-after “soft landing” — slowing down the economy without going into a recession — seems to be in sight at last. Investors and economists are now watching and waiting for when the Federal Reserve will begin decreasing interest rates. There’s still a chance of a recession in the upcoming year, but the general consensus is that the Fed will pull back sometime in the coming months.

So, how did America end up with such a significant inflation problem? After the COVID-induced recession during the pandemic, Americans were ready to use the money they had received in the form of stimulus checks and saved by staying at home. 

A mass increase in spending and pandemic-related supply chain bottlenecks sent the economy into an inflation spiral, peaking at a 40-year high of 9.1% in June 2022. Since then, inflation has dropped to 3.4%, approaching but not quite yet reaching the Fed’s 2% target.

Now that an end to runaway inflation and generally volatile economic conditions in the years since COVID seems increasingly in our grasp, consumers appear to be confident in the strength of the American economy. The University of Michigan’s Consumer Sentiment Index, which aims to measure consumer confidence about the overall state of the economy, rose to 78.8% in January.

“Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended,” says Surveys of Consumers Director Joanne Hsu in a statement published alongside the survey results.

Among the positive outcomes of the Fed’s efforts is our currently robust and extremely healthy job market. Job growth in December featured 216,000 new jobs added, and the unemployment rate was at a low rate of 3.7%, held steadily throughout the month. According to the Labor Department, the second week of January has featured the lowest level of weekly new claims for jobless benefits since mid-September 2022.

Increasingly positive consumer sentiment is showing through a rise of 0.6% in retail sales through December, double November’s rate. The Fed’s latest Survey of Consumer Finances has displayed a remarkable growth in Americans’ net worth and that 20% of families owned a privately held business in 2022 — the highest level recorded since the survey was first conducted in 1989.

Yet some issues continue to persist. While the producer price index (which measures prices at the wholesale level) declined by 0.1% in December, the consumer price index (which measures the prices consumers pay at checkout) has increased by 0.3% — above the Fed’s target range.

The White House appears to be riding a wave of optimism for the economy. President Joe Biden’s administration has been plagued with historically low approval ratings. The Pew Research Center polls Biden’s approval ratings as currently sitting steady at 33%, while opinions on the economy have increased by nine percentage points from last April to 28% in January.

“President [Joe] Biden is making progress lowering inflation while maintaining a strong job market: wages have risen faster than inflation for 10 months in a row, 14.3 million jobs have been created, and inflation has fallen by about two-thirds,” pushed Jared Bernstein, the chair of the White House’s Council of Economic Advisers, in a statement. “We have more work to do, but we’re on the right path as we execute President Biden’s agenda, and people are starting to feel it.”

In the meantime, Republicans continue to use prices as a point of criticism against Biden. In response to the report on the consumer price index, House Speaker Mike Johnson (R-La.) posted that the state of economic news is a “disappointment” on social media website X, lambasting “Bidenomics” for continuing to “cost every American family.”