Friday, 21 October 2016

Surging U.S. Monetary Inflation: The Money Supply Growth Rate Hits Four Year High

The U.S. money supply growth rate surges to 11.4% for the week ending 10 October according to figures released last night by the Federal Reserve. This was the highest y/y growth rate reported for almost four years (since December 2012). 


The spike especially in recent weeks is driven by a more than sixfold y/y increase in the Treasury's deposits with the Federal Reserve. Currently this account balance stands at $392 billion, an account that prior to the QE programs used to carry only a negligible amount. From what I know, the surge in the account balance is related to the Fed paying back to the Treasury most of the interest earned on its current balance of some $4.2 trillion in treasury-, federal agency-, and mortgage-backed securities. If we assume an average interest rate earned on these assets of 3%, the Fed will receive some $127 billion a year in interest, most of which will be paid back to the Treasury at regular intervals. 

If we exclude the Treasury's deposits from the money supply measure (as the official aggregates such as M1 and M2 do) the current y/y money supply growth rate comes in at a more modest, but still substantial, 8.5% (the upper end of the range during the last three years). However, as the Treasury tends not to sit on cash for too long, it is highly probably this measure of the money supply growth rate will soon pick up substantially as well. 

Though the Fed no longer officially targets the money supply, FOMC members are nonetheless most certainly following money supply developments closely as they probably have not forgotten that monetary inflation is the key driver of price inflation. The recent surge in the money supply could therefore exert at least some pressure in the direction of a rate hike. These monetary developments could also exert some upward pressure on the inflation component of bond yields.

____
Update 22 October 2016: please read the comments from Anonymous below regarding TBAC.

9 comments:

  1. I think Fed "back payings" don't play any role. The surge in account balance is related to the new debt issuance. Treasury accumulate more cash for risk management. If Fed create new money for Treasury why is there inverted correlation between Monetary base and Treasury account? Money go to Treasury account from accounts of commercial banks (someone buys new treasuries and pays for them). https://fred.stlouisfed.org/graph/?g=7RbX (Treasury account is inverted)

    ReplyDelete
    Replies
    1. But are you saying this account was not used for debt issuance a few years back?

      Delete
    2. It was used of course. Treasury just has raised cash level. They just issued more new debt than they need for goverment spending. Quote: "...the TBAC recommended that Treasury hold a $500 billion cash balance, or 10-days of liquidity, to ensure that all government obligations could be met in the event that Treasury lost market access." https://www.treasury.gov/press-center/press-releases/Pages/jl2687.aspx

      Delete
    3. Excellent information, was not aware so many thanks for sharing this. Do you know if the treasury actually committed to keep a $500 bn balance until such an event occurred?

      Delete
    4. I think surge in money supply growth rate is related to surge in credit of commercial banks.

      Delete
    5. I don't know. TBAC recommendation was made 2 years ago. Treasury has started to raise cash aggressively from 250 billion to 500 billions 3 month ago only. I think this is for risk management before presidential election. I don't know what they are going to do after. May be they spend some money may be not.... i don't know. Every time they aggressively raise cash level they cause stock market weakness. I guess this time it will not be exception.

      Delete
    6. Every one can see the source of money and size of Treasury account on daily basis here: https://www.fms.treas.gov/dts/index.html

      Delete
  2. Very important feedback for the very few (unfortunately) of us that pay attention to this. If there ever was a firm commitment to keep an emergency balance of say $500 bn, this would mean we could exclude that amount from the MS for the time being. That would have a significant impact on the MS growth rate. Thanks again for sharing this, much appreciated.

    ReplyDelete
    Replies
    1. TBAC may not force Treasury to do something. They only may give recommendation. I guess Treasury account still will be very volatile.

      Delete