It’s anyone’s guess what Fed Chairman Ben Bernanke’s legacy will be, but the possibilities are still wide open.
For those who think monetary policy falls short of perfection these days, there’s reason to read the recent weekly updates on money supply and wonder what comes next. Seasonally adjusted M2 money supply shows a rise of 5.0% from a year earlier (using a 52-week formula), according to the latest numbers from the Federal Reserve. In fact, M2 money supply has been rising by 5.0%-plus now for the past three weeks relative to levels of 52 weeks previous. As the chart below illustrates, that pace represents something of a minor milestone in money supply trends. The last time money supply was rising at 5% or higher on a consistent basis was early 2005.
For confirmation that the rolling 52-week trend is no statistical anomaly, we also ran the numbers on seasonally adjusted M2 on a 10-week rolling basis. The trend, however, confirms what the 52-week analysis shows: the supply of money is rising at higher rate than in the recent past.
The question is whether the new bull market in money is temporary or the start of something big. That’s hardly an innocent question with fears of inflation threatening. Only the Fed knows what comes next in matters of money supply, but for those of us on the outside there’s reason to keep an eye on the Thursday dispatches from the central bank regarding the quantity of dollars in circulation.
The Fed is trying to win over the bond market’s respect and admiration, but we wonder how that project will ultimately turn out if the path of least resistance in money supply is upward. A few weeks a trend does not make, of course, when it comes to overseeing the near $7 trillion of currency swirling around in the system. But a billion here and a billion there eventually add up to something more than a footnote if the momentum isn’t checked.