Tuesday, 16 October 2012

Movements in the U.S. Monetary Base and Money Supply (as of 3 Oct-2012)

The Federal Reserve Bank of St. Louis reported the Monetary Base and Money Supply (Stock) figures for the bi-weekly period ending 3 October on 12 October 2012. The data series used in the report below starts in 1984 and are the bi-weekly, end of period figures ending Wednesday.

The current monetary base is 5.94% lower than the all-time high. The M1 money stock for the week was the 3rd highest ever reported, only beaten by the figures reported two and three weeks ago, while the M2 yet again hit a new all-time high. The M1 Money Multiplier (M1MM) remains substantially lower than normal (as measured by the median), but compared to last year it continues to increase quite substantially (up 13.17%) driving growth in the M1 Money Supply. The monetary base in USD terms continues to remain largely unchanged (USD 2,559-2753 billion range) as has been the case now for about a year, but it remains at an unprecedented high level in historical terms. The M2/Base ratio increased yet again quite substantially on last year (up 10.00%) leading to a 7.21% increase in M2 on last year. If the two ratios (M1MM and M2/Base) start approaching their historical normal levels, the increase in M2 money supply will be substantial unless there is a corresponding decrease in the monetary base.

As reported some weeks ago, if M2 was to increase substantially, there will be a real risk of inflation increasing dramatically further down the line (see
here for more on this). This is why we monitor these developments closely, especially given the unprecedented high level of the monetary base combined with the large excess reserves of depository institutions in the U.S. (read more on that subject here). The Fed has ways to keep the M1 and M2 money supply down once the money multipliers start to increase, such as raising the federal funds rate and the interest rate paid on both required and excess reserves, increasing the required reserve ratio and through selling bonds (which reduces the monetary base). But there are limits to what and how much the Fed can do (we're in uncharted territory) to reduce money supply without it having adverse effects in some other areas of the economy (e.g. large scale selling of treasury securities would normally lead to prices on those securities being pushed down and yields going up).

Monetary Base
The current monetary base decreased 2.49% on the previous week to USD 2,589.48 billion. Compared to the same period last year it declined by 2.53%. The current monetary base is 5.94% lower than the highest ever reported (February 2012).

M1 Money Supply
The M1 figure decreased 0.41% on the previous week to USD 2,359.00 billion and was up 9.39% compared to the same period last year. The current M1 money stock is the 3rd highest ever reported as it was higher two and three weeks ago.

M2 Money Supply
The M2 figure increased 0.73% on the previous week to USD 10,197.00 billion which was 7.21% higher than reported for the same period last year. The current M2 money stock is again the highest ever reported.

M1 Money Multiplier
The reported M1 money multiplier ended the week on 0.911 which was 55.89% lower than the median (2.063) since 1984 and 70.90% lower than the highest ever reported (3.131). The multiplier increased 13.17% on last year and continued the trend of double digit percentage increase on last year for the 14th week in a row.

M2/M1 ratio
The ratio for the week was 4.323 and was 5.21% higher than the median (4.109) and 22.59% lower than the highest ever reported (5.584).

M2/Base ratio
The ratio for the week was 3.938, which was 51.26% lower than the median (8.079) and 67.45% lower than the highest ever reported (12.097).



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