Nov

28

I find that at this time there is no evidence from the Monetary Base numbers suggesting a change in policy. Additionally there is no change in the job growth numbers as evidenced by the payroll tax receipts.

George Zachar adds:

This morning William Poole observed that the MZM and M2 monetary aggregates “are chugging along at pretty steady rates.” Year over year, he noted, MZM is up 4.3%, while M2 is up 4.9%.

Although they have accelerated in more recent months, Poole said those money supply growth rates “are pretty close to the growth rate we’ve got for nominal GDP” and are “consistent with the growth that’s being forecast for next year.”

Since real GDP growth is expected to be “a little below 3%,” he said, “if you take a 2% inflation target that adds up to 4 1/2% to 5%, which is really very close to where money growth is right now.” So he said, “money growth is not telling you that monetary policy is tight or easy, just in line with GDP growth.

Bill replies:

If you think of the Monetary Base as a window on Fed policy, then the data makes the case that there has been no change in policy. Since the beginning of 2005 that policy has been moving from accommodative to restrictive. Thus there is no deviation from a restrictive policy, which at this time is very restrictive (more below).

George Zachar’s comment was more insightful. George pointed out how the Fed’s statements on M2 and MZM growth were contradicted by my data. The boys at the Fed think that they are walking the narrow line between restrictive and accommodative. The data suggests otherwise.

At this time the Monetary Base is in excess of 4 percent below the long-term mathematical fit of that data. This is more restrictive than in 1998. Perhaps our “planners” wanted to be more restrictive in 1998, but had to back off because of (a) Asian contagion, (b), Russian bond default and (c) Long Term Capital Management. In any case, the current data shows the present to be more restrictive, and there is no anxious moment to force a change. The period of 1990-92 had the most restrictive policy. Remember that as the period of “It’s the economy, stupid”.

Monetary Base is an interesting number, consisting of currency and deposits at Federal Reserve Banks. Breaking the Base down into those two components does not give you as complete a picture as the two together. For example, look at the two spikes: the earlier one was the Y2K spike caused by excess currency (the ATMs were all going to fail). The later spike (9-11) was caused by the Fed goosing the bank reserves. Only if you look at the Base data do you see both spikes.

I’m looking forward to Diebold next week.


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