Fed Still Accommodative
This article first appeared on SchiffGold.
Money Supply is a very important indicator. It helps show how tight or loose current monetary conditions are regardless of what the Fed is doing with interest rates. Even if the Fed is tight, if Money Supply is increasing, it has an inflationary effect.
One key metric shown below is the “Wenzel” 13-week annualized money supply figure. It was made popular by the late Robert Wenzel who tracked the metric weekly as an indicator for where the economy might be headed. In 2020, the Fed started reporting the data monthly instead of weekly. It should also be noted that Money Supply data can be heavily revised in future months.
Seasonally Adjusted Money Supply is delayed by a month. The three periods of increased money supply are for March through May.
Figure 1: MoM M2 Change (Seasonally Adjusted)
May saw a fairly large increase of 5.5% annualized.
Billions of $ | Annualized Growth Rate Since: | ||||||
|---|---|---|---|---|---|---|---|
Fed Variable | May 2024 | Apr 2024 | MoM Difference | 1 Month | 6 Month | 1 year | 3 year |
M2 Monthly Money Supply | 20,963.4 | 20,870.2 | 93.2 | 5.5% | 2.5% | 0.6% | 0.9% |
That is slightly below the average of +6.7%.
Figure 2: Average Monthly Growth Rates
Non-seasonally adjusted numbers show data through early June, with a similar large uptick in the latest month.
Figure 3: MoM M2 Change (Non-Seasonally Adjusted)
The weekly data below shows the activity at a more detailed level. You can see the big spike in the latest week.
Figure 4: WoW M2 Change
The late Robert Wenzel of Economic Policy Journal used a modified calculation to track Money Supply. He used a trailing 13-week average growth rate annualized as defined in his book The Fed Flunks. He specifically used the weekly data that was not seasonally adjusted. His analogy was that in order to know what to wear outside, he wants to know the current weather, not temperatures that have been averaged throughout the year.
The objective of the 13-week average is to smooth some of the choppy data without bringing in too much history that could blind someone from seeing what’s in front of them. The 13-week average growth rate can be seen in the table below. Decelerating trends are in red and accelerating trends in green. The last 20 weeks have been fairly flat with a slight tilt towards acceleration, but not meaningfully so.
Weeks | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 |
2.37 | 2.33 | 2.19 | 1.99 | 1.89 | 2.11 | 2.26 | 2.44 | 2.37 | 2.44 | 2.38 | 2.79 | 2.89 | 2.84 | 2.88 | 2.99 | 3.06 | 2.91 | 2.52 | 2.06 |
21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39 | 40 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1.59 | 1.25 | 0.73 | 0.27 | -0.34 | -0.71 | -0.92 | -1.24 | -1.51 | -1.61 | -1.5 | -1.33 | -1.05 | -0.95 | -1.17 | -1.41 | -1.54 | -1.74 | -2.06 | -2.53 |
41 | 42 | 43 | 44 | 45 | 46 | 47 | 48 | 49 | 50 | 51 | 52 | 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
-2.8 | -3.17 | -3.75 | -4.37 | -5.1 | -5.82 | -6.5 | -6.76 | -6.93 | -7.29 | -7.69 | -7.89 | -7.75 | -7.7 | -7.55 | -7.36 | -7.17 | -6.81 | -6.5 | -5.93 |
The plot below shows how this year compares with previous years. As mentioned, the recent period has been quite flat compared to history. The current year is below average for this time of year. Money Supply should dip some heading into the summer before rebounding later in the year. The rate is well above the rate from 2023 and on par with 2022 which saw a major deceleration at this time of year.
Figure 5: Yearly 13-week Overlay
The chart below shows the history of inflation, Money Supply, and Fed Funds. As shown, in 1970 inflation worked with ~2 year lag compared to Money Supply. Given this, it is possible that another bout of inflation is lurking just under the surface considering the massive spikes in 2020 and 2021.
Figure 6: YoY M2 Change with CPI and Fed Funds
The charts below are designed to put the current trends into historical perspective. The orange bars represent annualized percentage change rather than raw dollar amount.
Figure 7: M2 with Growth Rate
Below shows the 13-week annualized average over history. This chart overlays the log return of the S&P. Mr. Wenzel proposed that large drops in Money Supply could be a sign of stock market pullbacks. His theory, derived from Murray Rothbard, states that when the market experiences a shrinking growth rate of Money Supply (or even negative) it can create liquidity issues in the stock market, leading to a sell off.
While not a perfect predictive tool, many of the dips in Money Supply precede market dips. Specifically, the major dips in 2002 and 2008 from +10% down to 0%. 2022 was highly correlated with a fall in Money Supply and the rebound has corresponded with the big stock market move we have seen recently.
Please note the chart only shows market data through June 3rd to align with available M2 data.
Figure 8: 13-week M2 Annualized and S&P 500
One other consideration is the reverse repo market at the Fed. This is a tool that allows financial institutions to swap cash for instruments on the Fed balance sheet.
Reverse Repos peaked at $2.55T on Dec 30, 2022. Money has been gushing out ever since. While the Fed has been maintaining higher interest rates, this drop in reverse repos is certainly providing liquidity to the economy, driving Money Supply and the stock market higher. It has started to level out in recent weeks which could be a reason for the more sluggish growth recently. As of June 25th it stood at $466B.
Figure 9: Fed Reverse Repurchase Agreements
Money Supply can be a leading indicator and help explain the action in the stock market. Money Supply fell the entire year of 2022, bottomed in early 2023 was rising up until the recent period where it flattened out. Keeping an eye on Money Supply can help one understand how much wind the stock market has at its back.
Data Source: https://fred.stlouisfed.org/series/M2SL and also series WM2NS and RRPONTSYD. Historical data changes overtime so numbers of future articles may not match exactly. M1 is not used because the calculation was recently changed and backdated to March 2020, distorting the graph.
Data Updated: Monthly on fourth Tuesday of the month on 3-week lag
Most recent data: Jun 03, 2024
Interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/