The Fed OMO directly drives prices level/inflation. Look at the series below... the 10 year break even inflation rate[2] looks almost exactly like the stock market since the crash, but they weren't in sync before. Ofc, it's primarily being used to shore up the value of the 10-Year Treasury Constant Maturity Rate bond [3], which would otherwise look like [4]. But I think the money supply pressure effects both, and the relative quantities are on par, so seems like the pieces fit to me.
[1] https://www.investopedia.com/insights/what-is-the-quantity-t...
[2] 10-Year Breakeven Inflation Rate: https://fred.stlouisfed.org/series/T10YIE [3] 10-Year Treasury Inflation-Indexed Security, Constant Maturity: https://fred.stlouisfed.org/series/DFII10 [4] 10-Year Treasury Constant Maturity Rate: https://fred.stlouisfed.org/series/DGS10
- Fed open market operations: $2.8T introduced over 9 month by the Fed in 2020[1].
- Stock market (DJIA) run-up in 2020: $2.2T [2]
I don't think this can be just correlation, even on the simplest reading of how the Fed OMO works, but there is debate about this[3].
[1] https://fred.stlouisfed.org/series/M1. I believe M1 money is a good proxy for the Fed's open market operations that would go towards the kind of asset purchases that would increase stock equity valuation. I'd appreciate any feedback on this
[2] DJI went from $22k on Mar 1 2020 -> $30k, for an $8k change by end of year. DJI had a market cap of $8.3T when it was at $29k Dec 2019[2.1], so 8/29=0.27. 27% of 8.3T = $2.2T.
[2.1] https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
[3] https://economics.stackexchange.com/questions/12226/does-the...