Money Supply Exploded After Fed Purchases Began To Settle

Lee Adler, Wall Street Examiner

The following is an excerpt from The Wall Street Examiner Professional Edition Fed Report published previously.

I have been alluding to the fact that once the Fed’s outright MBS purchases began to settle that the US money supply measures should explode. Those purchases began to settle in November, and lo and behold, money supply growth has exploded. Has anyone noticed? Does anyone care?

M2 and MZM both rose sharply to new all time highs in the week ended December 24, 2012. As a result of the Fed’s earlier pause in money printing (aka Quantitative Easing), in July 2012 quarterly growth rates had come down from 15% on MZM and 12.6% on M2 to around 0-1%. Since then they have rebounding sharply to their present levels around 20.7% on MZM and 19.7% on M2. The annual growth rate had declined from over 10% early in 2012 to around 6% in July before rebounding to the current 7.5%-8% area. Apparently the Fed thought that was too slow, or that money supply doesn’t matter. So it decided to pump up the volume.

This latest surge in money supply growth began in November when the Fed started settling its outright MBS purchases. I can’t wait to see what happens when the QE4 Treasury purchase settlements start to show up in the January data, along with the next mammoth MBS settlements January 14-22.

That information will begin to appear in the data at the end of January. I suspect that the annual growth rate will climb toward 15-20% over the next few months.   Perhaps that would panic the Fed into pulling the plug. Or perhaps it will wait for the tortoise like, understated, core PCE measure to move up. By then it would be far too late to put the genie back in the bottle.

The unanswered questions are when and how the repercussions will become apparent. Will they be limited to just asset price inflation? Commodities? Or will there be a broad based rise in CPI as well as wages and salaries? It has been so long since that has happened, people forget that it’s even possible. We should know in a few months whether it is. My hunch is that the answer will be yes, and that the Fed, as has historically been the case, will be behind the curve in responding.

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2 replies on “Money Supply Exploded After Fed Purchases Began To Settle”

  1. Lee Adler, thank you for your excellent article linking the money supply to the Federal Reserve Bank’s purchases of debt instruments and also to commodities price inflation. Please let me know where I can find more articles such as the one above that you wrote. I am astounded as to the difficulty I have had in finding such articles.
    — Paul D. Bain
    [email protected]

  2. @paulbain Thanks so much for the kind words!
    John usually reposts most of my free articles here on GEI. You can also find my articles archived on my site. I cover these issues extensively in the Wall Street Examiner Professional Edition. Please click the link in the right sidebar for more info if you are interested.

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