Inflation rates are hitting levels not seen for decades. The cost of living is quickly spiraling out of control. Global Central Banks (notably The Federal Reserve) are now taking action to control rising prices. Interest rate hikes have already begun and will likely continue throughout 2022. The stock market has fallen in response, with the S&P 500 down 10% since March. Will The Fed's actions result in a recession? Or worse yet, stagflation.

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In 2008, the Federal Reserve used unconventional monetary policy for the first time. This is what's known as quantitative easing (QE). This was done in response to the collapse of the U.S housing market which sent ripples across the global economy. In other to encourage spending, The Fed flooded the economy with cheap liquidity. For lack of a better explanation, this is the equivalent of The Fed having a big money printer. Since 2008, $8 trillion have been printed via quantitative easing. This has devalued the dollar and largely contributed to the inflation we're seeing today.

Global supply chains shut down in 2020 and continue to be impacted by disruptions. With supply restricted, the excessive demand for goods and services caused by quantitative easing went unmet. This resulted in an increase in prices, known as demand pull inflation. Now we're paying significantly higher prices for energy, food and transportation.

The Fed have since pulled the plug on quantitative easing and have introduced interest rate hikes to the Federal Funds Effective Rate. The effects of this are already being felt. The 10 YR U.S Treasury yield is about to hit 3% (the highest since 2018). This implicitly results in an increased cost of borrowing. Furthermore, 30 YR Fixed Rate Mortgage rates have skyrocketed to highest levels in 11 years, worsening housing affordability. We don't know for certain whether we're heading for a recession, but we need to avoid stagflation at all costs.

In February, there were 11.3 million job openings in the U.S. Workers have unprecedented bargaining power due to the Great Resignation and are commanding higher wages in response to inflation. This in turn is causing further inflation. This crisis has raised the question of whether a Central Bank Digital Currency (CBDC) should act as a digital dollar. While Janet Yellen has recognized the potential viability of such a solution she also notes that it will take many years to implement.

Investors may be tempted to sell out of their stocks and index funds amidst this crisis. However, the fact remains, if you missed the best 10 days of the stock market over the last 20 years, your return on investment over that time period would be cut in half. You have to be in it to win it. While the stock market might suffer in the short-term as money rotates into bonds, in the long-term investors can be optimistic. What's required now is cost consciousness and emotional resilience.

*Malone Financial is affiliated with the aforementioned companies. Malone Financial receives a commission for any customer conversions realized via the affiliate links. This video includes my own opinions (which do not reflect the opinions of said companies). Investing involves a risk of loss. Nothing mentioned in this video should be construed as financial advice.

#inflation #costofliving #recession

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