Stock markets are reeling as the Federal Reserve and its central bank counterparts clammer to get runaway inflation under control through a series of steep interest rate hikes. Where this ends, no one knows. But it’s no mystery where this inflation began: The Federal Reserve.
Back in early 2020, talk of an imminent shutdown of the global economy briefly sent the stock market into freefall. The Federal Reserve headed off this market downturn with a series of rapid rate cuts, bringing the federal funds rate to near zero by the end of March 2020.
The Federal Reserve kept the federal funds rate near zero from the end of March 2020 all the way through the end of February 2022, at which point governments rolled back most vaccine passports and Covid mandates for purely political reasons, citing a change in “the science.”
Near-zero interest rates during this two-year period led to an extraordinary boom in stock prices, with the Dow and S&P 500 rising over 55% and 65%, respectively, even as lockdowns and mandates wrecked the economy. This stock market boom fostered more political support for lockdowns and Covid mandates, with the easy money acting as an opiate that led many to believe the economic damage from these policies wasn’t as bad as it really was.
Now that most Covid mandates have been rolled back and we’re seeing record-high inflation, the Fed is rapidly raising rates, leading to a severe market downturn and possibly an economic recession.
But here’s the problem: Inflation had already begun rising out of control long before the Fed started raising rates. Economists predicted the Fed’s policy would lead to high inflation back in 2020. And in fact, by April 2021, nearly a full year before the Fed began raising rates, the annualized inflation rate had already hit 4.2%—more than double the Fed’s target inflation rate of 2%!
