Take heed as M2 growth hits zero and monetary easing reverses

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Throughout the year, the Fed, led by Jerome Powell, has raised rates at an unprecedented pace.

Of course, the panic among policymakers to tighten monetary policy is largely a result of the central bank’s long-term easy monetary policies and multi-year interest rates.


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A sugar rush of bailouts and ultra-loose fiscal policy came shortly after severe lockdowns and a near-total freeze in economic activity in a desperate attempt to keep families afloat.

It didn’t take long for the turn from helplessly stuck below target inflation to outright dangerous inflation to materialize.

Source: FRED database

Quantitative tightness

The central bank’s tight stance also extends to the amount of money in circulation.

The famous (or now infamous) M2 indicator contracted for the fourth month in a row, with monthly figures for the seasonally adjusted money supply shrinking.

Source: SchiffGold

In an article, SchiffGOLD detected,

Looking at the average monthly growth rate, prior to Covid, November has historically been expanding at an annualized rate of 5.2%. This year it missed by an incredible 870 bps.

Usually, the last quarter of the year sees a strong rise in the money supply, making this divergence from the trend even more pronounced and painful.

Importantly, as shown in the graph below, annual M2 growth has reached zero for the first time in history.

Source: FRED database

Are setbacks striking again?

Even if price pressures appear to be beginning to bend to the Fed’s favor, the cost of inflation remains high.

Because society has yet to see the dreaded backlash effect.

Danielle DiMartino Booth, CEO and Chief Strategist at Quill Intelligence, has nearly a decade of experience as a consultant to the Dallas Fed. Mentioned,

The central bank recently published a paper that instead of the 18-month period at which you start to feel the pinch of tighter monetary policy, it has now actually dropped to 12 months.

Fed economists expect Q1 to see a sharp decline and the start of a full-blown recession.

Another year, another quarter

The central bank’s decision to hike an additional half point in December means the tightening game is very high.

In January 2023, the FOMC will raise at least another quarter percent.

Market data reflects this expectation CME FedWatch tool Reported about seven-to-three splits between possibilities for a quarter- and half-point rise, respectively.

The Republican-controlled House of Representatives may not be willing to provide financial buffers to debt-ridden households, given the economic devastation caused by direct transfers over the past two years.

DeMartino Booth added that he doesn’t expect tax refunds and amnesty measures to be anywhere near as accommodating as they were in 2022, meaning household budgets will be more strained.

Ultimately, as many economists argue, the option of a soft landing is no longer a possibility.

If the central bank somehow veered off course, the economic consequences would be catastrophic.

Even with monetary easing now at the Fed’s doorstep, tough financial conditions are deep-rooted, especially in the gloom over job creation in low-skilled sectors (you can read about Here), the central bank will continue to be hawkish for now and will increase by a quarter percent in the coming weeks.



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