The Federal Reserve is scheduled to convene its FOMC meeting next Wednesday to decide on what happens next with the price of money. By most accounts, the assembly promises to be a yawn. Fed fund futures anticipate no change any time soon by predicting that current 5.25% will remain the standard for some time.
Perhaps that’s a prudent choice for policy makers, considering that full and clear clarity on the economy remain elusive. As we wrote yesterday, there’s a case to be made that the glass is half full as well as half empty. Indeed, economic data in recent months have dispensed conflicting signals.
Yes, that’s always true. But the stakes seem especially high at this juncture, with the economic cycle at middle age or later. Meanwhile, the capital markets have been running for some time. Value isn’t exactly gushing in abundance when it comes to such metrics as risk spreads and earnings ratios over price. Of course, if you think that the recent past will continue into the foreseeable future, there’s nothing much to do but hang on and collect the capital gains.
Enter the Fed, which theoretically must keep inflation at bay while juicing the economy and sidestepping a recession. A thankless task, and one that may be impossible. In short, the central bank must pick one or the other, or so one might assume.
If so, we present evidence that juicing the economy may be the preference these days. M2 money supply, the broadest measure published, has been pushing higher for some time now, as our chart below shows. Based on rolling 52-week percentage changes, M2 rose by nearly 7% for the year through April 9, although it’s since slowed to 6.3% That’s the fastest rate of printing money in more than three years.
The rise in the annual change in M2 has been fairly consistent this year, suggesting that the central bank is deliberately injecting money into the system in higher absolute and relative quantities. How fast is the recent 6%-plus rate of growth in money supply? More to the point: is it too fast? One might answer “yes,” based on the fact that first-quarter GDP advanced by 5.3% in nominal terms (or 1.3% in real terms), according to the Bureau of Economic Analysis.