Recovery: Pandemic vs. Tariffs

Answer: When the World Health Organization (WHO) officially announced the COVID-19 pandemic on March 11, 2020, markets dropped over 30% between February 2020 and March 2020. Covid was a frightening time with lockdowns and stay-at-home instructions. The fear and uncertainty surrounding health issues and the unknown economic impact of global shutdowns were profound.

In contrast, on March 1, 2025, when President Trump announced the use of tariffs as a way to negotiate with trading partners, financial markets panicked and fell as much as 6% in one day. Later, when discussions about tariff reductions or pauses took place, markets jumped as high as 12% in response.

Stimulus and Spending: Inflation Setup

During the pandemic, the ability of consumers to spend and produce was drastically reduced because of the lockdowns. In response, government stimulus programs injected cash into the stalled economy. These government transfers to households and businesses helped but also set the stage for high inflation.

Pent-up demand in conjunction with an accumulation of cash resulted in inflation. Online shopping is a massive example of that activity. In Economics 101, we were taught that inflation, or higher prices, is the result of too many dollars chasing too few goods and services.

Inflation Peaks: A 40-Year High

The US Department of Labor Bureau Statistics documented annual inflation in the US reaching 8% in March of 2022, topping out at 9.1% in June 2022, the highest in more than 40 years. For reference, the current rate is 3.01 percent.

The Fed’s Fight: Interest Rates vs. Consumer Behavior

Inflation was an even more difficult problem to solve than the Fed first thought. Increasing the federal funds rate (cost of money) to 5.25%-5.50% wasn’t enough to persuade Americans to save or invest. Collectively, consumers went on a colossal spending spree.

As firms needed to entice workers back to work, lower income workers benefited. Higher wages were offered to those who had been impacted the most, drawing them back to the labor force. Higher earners generally had more flexibility with working from home options.

In addition, the Government passed favorable incentive acts to increase investment in several sectors of the economy with lower interest rates than found in the overall economy. These factors combined created an environment that supported economic growth even as the Fed continued to increase interest rates.

Tariffs Today: A Different Economic Landscape

In today’s situation, we are facing economic shocks from tariffs. Despite this, the economy, although weakening, continues to expand. All this means that the conditions are different now than when we were recovering from the pandemic recession.

AI and Efficiency

Households do not have excess cash to go on spending sprees and push prices upward. Disposable income is growing slowly, meaning that for a consumer to buy more of something, they’ll need to reduce consumption of other goods. This does not lead to inflation. Also, greater efficiency found from the use of Artificial Intelligence (AI) is prompting investment in this technology by companies. AI also boosts economic expansion and is producing gains in the stock market.

Although the projection is for inflation to inch higher next year, it’s expected to normalize once the initial tariff impact is out of the system. This doesn’t mean that the price of goods and services is going to come down, which is what almost everyone would like. It does mean that the rate of increase in prices (inflation) is going to slow down and approach the target rate of 2.00% sought by the Fed over the next several years.

Inflation is measured by the annual change in the price index for personal consumption expenditures (PCE). The assumption is that consumers, households, and businesses can make sound decisions about spending, saving, and investing in an environment when inflation is in the 2% range.

Inflation Slowing, Not Reversing

The Fed will have to tread lightly as we navigate the tariff maze, especially if the economy picks up during the first half of 2026. Any economic rebounds will likely be powered by temporary stimulus from tax cuts, tax refunds, and accelerated depreciation for businesses under the One Big Beautiful Bill (OBBB). Consumers are in a different place than they were post-pandemic, when cash was plentiful while goods and services were scarce.

Although there are similarities in the recoveries from both of these events, there are important differences as well. Aggressive stimulus money from the government and pent-up demand from consumers drove the pandemic recovery. Today, consumers are more restrained as they adjust to tariff concerns, calling for cautious optimism. It’s important and helpful to understand how monetary tools influence markets and consumer behavior. Stay focused and plan accordingly.