M2 also increases
Money supply is increasing again.
of dramatic increase in money supply, was one of the wake-up calls to alert those paying attention to rising inflation, as measured by M2. The decline in M2 was also an important signal that inflation would moderate this year.
M2 is rising now. It appears to have fallen in late October, coinciding with the peak in the 10-year Treasury yield. As the graph below shows, M2 then began to increase rapidly and steadily.
The latest weekly statistics were released on December 26th and continued through December 4th. Ahead of the Fed's dovish policy shift. These signals that money supply has risen to its highest point since April, when M2 surged following the failure of Silicon Valley banks and the Federal Reserve's move to support the banking system.
On a year-on-year basis, the money supply is still shrinking. However, the current contraction rate is only 2.6%, compared to 4.2% last spring.This suggests that Money supply no longer limits real economic activity or inflation as much This was also the case during the months when inflation was falling.
If we graph the year-on-year change in inflation and money supply together, we can see that the rise in inflation lags the rise in money supply by about 12 months. This is consistent with the 12-24 month lag suggested by the professors. john greenwood and Steve Hanke Said Similarly, the annual increase in M2 peaked in February 2021, and inflation peaked 16 months later.
of M2 first leg ends in late June 2022 And then it went sideways for the rest of the year. The inflation rate followed this pattern with a lag of about a year, declining year-on-year until June of this year, and then remaining roughly flat.
Based on this pattern, we expect inflation to continue to decline, but the decline should slow. If M2 continues to rise, a reversal is expected. Inflation should rise again.
The chart police will absolutely hate this next chart. That's because it combines the year-on-year change in the Consumer Price Index (CPI) with the absolute level of the money supply.But sometimes you have to Breaking the rules of charts to understand economic reality. This also shows that inflation rises with a lag behind the quantity of money and then falls as the money supply contracts.
If you squint to the right of the graph, you can see that the money supply has increased since the last CPI reading, which showed a decline in inflation. We do not expect this discrepancy to continue. If the money supply continues to expand, inflation may eventually occur.
The Fed risks the emergence of politicization
This has important implications for the Fed.It suggests the following Rate cuts early this year could be very risky That's because the Fed could cut interest rates just before inflation flares up again. More explosively, the Fed could find itself in the unenviable position of having to cut rates in an election year and then raise them after the election.
It seems increasingly unlikely that President Joe Biden will win re-election, which would be bad enough. donald trump In an exclusive interview with Breitbart News, he had already predicted that the Fed would cut interest rates to keep Biden in power. An election-year cut, subsequent rise in inflation, and a new rate hike cycle would strengthen the view that the Fed is acting politically motivated.
Now imagine if Donald Trump wins in November and the Fed has to raise interest rates to control inflation.of political conflagration The result would be to threaten the Fed's independence and perhaps even its survival. The United States has seen central banks collapse in the past due to the belief that they have become tools of entrenched elites. The same pattern could be repeated if the Fed lowers rates during the election and then raises them under the Trump administration.
There seems to be a big risk in lowering interest rates. The economy is at full employment and growing faster than long-term trends.
