Capstone: The Federal Reserve and inflation
Thesis: The Federal Reserve and other Central Banks around the world created the 2020-2021 stock market rally and 2022 inflation crisis by irresponsibly using a tool that injects liquidity into the economy known as Quantitative Easing.
My Capstone project is focused around the Federal Reserve's mismanagement of the economy, allowing for inflation to rise and the stock market to overheat. I have done a deep dive into why this happened, how the Federal Reserve could have prevented it, and how the rest of the world is affected by it.
Quantitative Easing
United States M1 money supply
Since the 2008 recession, the federal reserve has been continuously "printing" money by using the tool Quantitative Easing (QE), which is used to buy debt securities. During the 2020 Covid Crash, the FED was forced to print trillions upon trillions of dollars to prevent a total collapse of the economy. We are now feeling the effects of this money printing, with core Consumer Price Index(CCPI) hitting a 40 year high of 6.66%, and CPI hitting a 40 year high of 9.2%. However, QE is not the sole cause of inflation, supply shocks from the COVID-19 lockdowns around the world was a major cause of price increases. Even with this information, my paper is focused on how QE is a major reason why inflation exploded upwards.
Interest rates
Federal Funds Effective Rates since 2004
Since 2009, the federal reserves interest rates have been at 0 or near 0 for the past decade. Interest rates are how much it costs to borrow money, having 0 rates means that it barely costs a business anything to borrow, leading to growth. In 2018 the FED attempted to raise rates, but the Covid-19 pandemic, along with Former President Donald Trump pressuring the chairman of the FED Jerome Powell, put a stop to this. This 0 interest rate environment led to historic economic growth. The federal reserve has been hiking rates faster than almost any time in history. The Fed has realized their mistake and is desperately trying to fix it. While rate hikes have had an impact on inflation, they are also causing a contraction in the economy. Economists are predicting a recession in 2023 due to these rate hikes.
The 2020-2021 stock market rally
Due to added liquidity because of QE, the S&P 500 stock index, an index which is composed of the top 500 U.S based companies, grew over 100% its lowest point during the COVID-19 crash, one of the fastest market recoveries in history. This market rally was only possible because of the Federal Reserve's buying of assets.
Myths about inflation
Many politicians have called this rise of inflation "the Putin price hike." Although the Ukrainian war has had an affect on gas and food prices, it is not the sole reason why inflation exploded upwards.
My product
As for my product, I am going to create a series of tik toks (social media campaign) explaining the federal reserve and the inflation crisis of 2022.
