Wednesday’s release of the FOMC’s Jan.31 - Feb. 1 meeting minutes held few surprises but did provide some further insight into the leanings of the officials.   All agreed that the risks were still more to the downside for economic activity and that restrictive policy stance would need to be maintained until inflation proved to be on a downward path.   The consensus was to hike rates 25 basis points, but it was revealed that a “few” (generally thought to mean more than two) were actually in favor of a 50 basis point hike.  

That meeting was over three weeks ago and it now appears that those “few” participants may have been prescient since the data since then has primarily shown the economy reaccelerating.  Accordingly, the markets have raised expectations of further rate hikes in March and May, and perhaps even June and July.   

One topic that the Fed, and generally the markets, continue to choose not to talk about is the good old fashioned money supply.   Focusing on money supply has not been in vogue since well before the pandemic.  Jay Powell made clear his stance when he reported to Congress in February of 2021 that “the growth of M2 . . . doesn’t really have important implications for the economic outlook.”    He testified again in December of 2021 that the connection between money and inflation ended about 40 years ago.

It is nevertheless worth being aware of what the monetarists have been pointing out.  In March 2020, M2 money supply was $15.5 trillion.  With the massive pandemic stimulus, it grew to $21.7 trillion in just two years, a staggering 40% increase.  (It took over 100 years, since the Fed was established in 1913, to grow to that $15.5 trillion mark.)   Now, for the first time since the 2008-2009 Great Recession, we are seeing an actual contraction in the money supply. The growth rate of broad M2 money has turned negative – an extraordinarily rare event – and the indicator has contracted 5.4 % over the last three reported months.  (See graph below.)

Critics of the Fed say inflation and growth are slowing more dramatically than many believe and that Powell and his crew are putting too much weight on the wrong risk. Steve Hanke, the professor of Applied Economics at Johns Hopkins University, believes that with the U.S. money supply contracting at an unprecedented rate, a recession will be around the corner.  The lag may take one to nine months from the initial contraction in money supply but history proves that the likelihood is very great. 

While none of us have that magic crystal ball in these unprecedented times, we hope to offer insight and thoughtful analysis to guide your decisions.   With short term treasuries now hovering around 5% and the 10 year bumping against 4%, levels not seen in nearly
15 years, we continue to believe that it is wise to find a way to participate in this market. We look forward to continuing the conversation and assisting with your portfolio needs.