The "excess savings" that American households accumulated amid the COVID-19 pandemic gradually declined over the last two years and were depleted in the first quarter of this year, according to new research by Federal Reserve economists.

At the outset of the pandemic, massive amounts of fiscal stimulus in the form of direct stimulus payments to American households and other temporary measures like the student loan repayment pause and expanded child tax credit piled up in households’ accounts. As the pandemic played out, spending was inhibited by concern about the virus, supply chain disruptions and government-imposed lockdowns, which meant that the excess savings did not begin to decline until late 2021.

The excess savings American households had accumulated in the last few years was depleted in the first quarter of 2023, according to the research note by Federal Reserve economists Francois de Soyres, Dylan Moore and Julio Ortiz. In their research, the trio defined excess savings as the amount of savings households are holding above the preceding savings trend.

"To mitigate the health and economic fallout from the COVID-19 pandemic, governments around the world engaged in large fiscal support programs which increased the demand for consumption goods, but production of these goods did not adjust quickly enough to meet the sharp increase in demand," the economists wrote in noting how the excess savings contributed to a surge in inflation.

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Other advanced economies followed a similar trend in terms of accumulating excess savings early in the pandemic before those were spent down over time. However, the economists found that other advanced economies still have excess savings amounting to about 3% to 5% of gross domestic product.

The economists wrote that the sharper decline in excess savings meant that those dollars played a bigger role in supporting demand in the U.S. economy over the last year, "Given the more rapid drawdown of excess savings, aggregate demand in the United States is likely to have been more than in other countries over the past year."

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The economists explained that excess savings have built up in the U.S. economy during past downturns – notably the early 1980s recession and the global financial crisis – but it accumulated and was depleted over a longer period of time than what transpired during the pandemic response. The excess savings accrued during the COVID-19 pandemic was depleted in about 10 quarters, whereas the other two recessions had excess savings remaining after 19 quarters.

Consumer prices began to increase dramatically in mid-2021 when high spending levels combined with supply chain woes sent inflation soaring from 1.7% year-over-year in February to 7% in December 2021. Inflation would later peak at 9.1% in June 2022, the highest level in 40 years, at which point it would begin its gradual decline.

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To tamp down inflation, the Fed embarked on a campaign of interest rate hikes which has so far featured 10 increases over the course of 15 months. Although inflation has eased somewhat since that four-decade high, it remained at 4% in May – double the Federal Reserve’s target rate of 2%. 

At its most recent meeting, the central bank opted to pause rather than go forward with another hike in June. However, more interest rate hikes could be coming later this year, as the minutes from the Fed’s Open Market Committee (FOMC) meeting last month revealed that, "Almost all participants noted that in their economic projections that they judged that additional increases in the target federal funds rate during 2023 would be appropriate."

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Further rate hikes could tip the U.S. economy into a mild recession, which Fed policymakers have viewed as likely to occur later this year, although staff economists now view the possibility of the economy continuing to grow slowly and avoiding a downturn as "almost as likely as the mild-recession baseline." However, for now, a mild recession remains the prevailing outlook.

"The economic forecast prepared by the staff for the June FOMC meeting continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery," the minutes said. 

FOX Business’ Megan Henney contributed to this report.