This issue of Investment Insight applies the concept of the velocity of money to examine the U.S. Federal Reserve's response to the 2008 global financial crisis. The analysis revolves around the "Equation of Exchange," a formula that focuses on how much money is flowing through the economy and how quickly (or at what "velocity"), in relation to price levels and the nation's total economic output.
Applying this formula, Segal Rogerscasey examines why money velocity has continued to decline amid muted rates of inflation and gross domestic product growth, even as the Fed has provided trillions of stimulus dollars to the economy. The publication also discusses some of the possible consequences if the Fed withdraws stimulus too slowly or too quickly - and how investors might want to prepare for such outcomes.
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