What is velocity of money?

What is velocity of money?

And you might be asking yourself, why is this important?

Why would I even want to learn about what velocity of money is?

So I’m going to talk about that as well. And simply put velocity of money is the rate at which money changes hands in the economy. When the economy is running faster and things are moving faster, velocity of money is faster. That means money is changing hands faster, more times in a given period of time. If the economy is contracting, velocity of money is lower. The interesting thing is that ever since the housing crisis in 2008, velocity of money has been much lower than it has been historically. That just suggests that despite the fact that we’ve had pretty good economic numbers over the past decade and a half, maybe the economy hasn’t been as strong as it appears because of things like the government programs that the Fed’s doing, like quantitative easing, keeping interest rates at zero, things like this.

This is important to look at with what’s happening right now with inflation, because as inflation has become hotter, the Fed has raised interest rates to try to slow down the economy. And as interest rates go higher, the theory is that velocity of money will slow down. People will spend less money because it’s more expensive to buy things. It’ll cause things to contract. These are things to watch as we move forward here, to see if this increase in Fed interest rates does, in fact, slow down the economy. If we end up going into a recession, like a lot of people think, I agree with that.

I think we’re heading to a recession at some point here, but time will tell. The next Fed meeting is at the end of July. We’ll see what they do there, if they continue to raise interest rates.
Again, when the Fed raises rates, this affects all of our buying power as consumers with things like credit cards, auto loans, short term type debts that are more tied to the short term rates of the Fed influences. It doesn’t necessarily affect mortgage rates. It can trickle down to mortgage rates, but a lot of times mortgage rates aren’t directly correlated. That’s just a little bit about what velocity of money is. If you have questions about that or want to talk about it, or you have any other mortgage related questions, give me a call.

Once again, my name’s RJ Baxter, have a great rest of your day. Thanks a lot. 303-670-0137 or baterteam@fairwaymc.com