Gauge of Money Supply Posted a Fractional Gain in August

The Federal Reserve’s narrowest gauge of money supply (measured in real or inflation-adjusted terms) posted a fractional gain in August vs. the year-earlier level – the first positive year-over-year reading since February 2016.


By James Picerno

The return of annual growth for the monetary base suggests that the central bank may be laying the groundwork to slow or even reverse its recent efforts to tighten policy.

Recall that real M0’s annual trend offered an early sign in 2015 that the Fed was moving toward hiking interest rates for the first time in nearly a decade. Later that year, in December, the central bank announced that it was raising the target range for the federal funds rate. The central bank has increased rates several times since then.

In the nearly two years since that first hike, real M0’s annual trend has been mostly negative, with a downside bias that reached a trough in Oct. 2016 via a 13.4% year-over-year decline — a 68-year low. Over the subsequent months, the annual decline’s depth has been easing, ticking above zero in August for the first time in 19 months. Is that a sign that the Fed’s recent program of tightening monetary policy is downshifting or perhaps in the early stages of reversing? It’s too soon to know for sure, but M0 data deserves close attention in the months ahead.

Meantime, what might convince the Fed to rethink its recent bias for tightening policy? Relatively muted inflation is probably a factor. In fact, the latest numbers through August show that the core measure of the personal consumption expenditures index – the Fed’s preferred inflation gauge – continued to decelerate. The annual change in core-PCE eased to 1.3% through August, the softest pace since Nov. 2015. The sliding trend serves as a reminder that the Fed’s 2% inflation target has become increasingly elusive this year.

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Market expectations for inflation, however, have turned modestly higher lately. For example, the implied inflation rate via the 10-year nominal Treasury (NYSEARCA:IEF)yield less its inflation-indexed counterpart ticked up to 1.85% yesterday (Oct. 14), close to a five-month high.

Note, too, that the crowd’s currently expecting the Fed to raise interest rates at the Dec. 13 FOMC policy meeting, based on this morning’s fed funds futures data via CME. (No change is expected for next month’s FOMC meeting.)