Federal Reserve (Fed) faces an important decision in the coming weeks. the market expects Central bank hikes rates by 25 basis points that would indicate a significant deceleration in the historical rate of growth to actively combat inflation.
decrease in growth rateIf done, it would be for a good reason: It looks like the rate hike is starting to work. This was stated this week, for example, by the Bank of Canada, anticipating the Fed. The annual rate of inflation fell for six months in a row in December and looks like it will continue to slow down.
Also, another sign that the Federal Reserve’s rate hike is in the works: Amount of Money in the Economy Contracted in December, growth of m 2 A variable that measures the money supply in an economy, including liquidity in circulation, balances in retail money market funds, and savings deposits. The rebound in 2020 was followed by a slowdown in the last two years, But the figures for December show a decline.
Money supply growth was negative at 1.3% in December Compared to a year ago, M2 (money supply) declined for the lowest and first time ever based on all available data. The Fed began tracking this indicator in 1959. growth of November was already 0.01%, down from a February 2021 high of 27%.
The decline points to a cooling of the economy and a strong outcome A rise in rates, which would seem to fuel recent recession fears. However, the indicator does not point to a sharp economic downturn. Mentioned M2 remains 37% higher Despite suffering its biggest recession since before the pandemic. In other words, the amount of liquidity in the system remains high, economists say, indicating that there may be more room for the economy to normalize.
“Families are still sitting on most of these deposits [del 2020]dice Viral Acharyaformer deputy governor of reserve Bank of India And bank deposits increased in 2020, referring to the stimulus checks, a current professor of economics at NYU Stern.
Other causes and danger level
But that’s not the only reason the M2 is skyrocketing — and falling fast. To do this, we can look at the actions on the Fed’s balance sheet. “Quantitative easing,” or bond purchases by the Fed during the pandemic helped boost the economy and the central bank’s balance sheet, boosting it to nearly $9 trillion. , Now the Fed is cutting its total assets through so-called quantitative easing, thereby reducing liquidity.
loss The Fed’s total assets fell 5.3% from last year’s high on January 18, but more than double the balance of $4.1 trillion in February 2020, before the start of the pandemic. That’s a lot of money, but the Federal Reserve doesn’t want to risk upsetting the financial markets by ramping up the tightening.
la fede “Does not want to turn monetary tightening into an episode of financial instability” says Acharya, who along with three other economists published an article in August titled “Why Shrinking Central Bank Balance Sheets Is an Uphill Task.”
as a last resort, As M2 keeps on decreasing should continue to help cool inflation, as a decline in monetary reserves reduces demand and decreases “the” Ability to support bank loans and other forms of financing for families-companies and financial market transactions”, confirms Nathan SheetsCiti’s chief global economist.
Still, investors shouldn’t assume that falling M2 will automatically signal an economic recession, according to Richard Farr of Merion Capital Group. “M2 would have to drop at least another trillion dollars for it to matter”, he says. It remains to be noted.
