Monday, July 13, 2009

Is the Fed really pumping out the money? Exit strategy?

The Fed is expected to lay out its exit strategy when Ben Bernanke reports to Congress next week in his Monetary Policy Report to the Congress (Humphrey Hawkins). From Bloomberg:
The Fed pumped $1 trillion into the banking system over the past year through bond purchases and emergency loans, doubling assets on its balance sheet. Reassuring investors that inflation won’t exceed forecasts once the recession ends will give the Fed more credibility, said Dean Maki, chief U.S. economist at Barclays Capital Inc. While policy makers have spoken about specific tools they may use, they haven’t laid out a strategy.

“Now is the time to articulate the exit strategy,” said Vincent Reinhart, former monetary-affairs director at the Fed and now resident scholar at the American Enterprise Institute in Washington. “The Federal Reserve doesn’t speak with one voice and the testimony is an opportunity to present the consensus view."
But according to Cactus at Angry Bear - we differ on our views of Ben Bernanke as a central bank Chair - the Fed has already begun implicitly not raising its balance sheet since December.
As is often the case, what we all know is false. Wrong. Bull$#%&. The Fed has not been pumping money into the economy lately, at least if you define lately as being “since December” and going through May, the last date for which data is publicly available in FRED, the Federal Reserve Economic Database maintained by the St. Louis Fed. Check out the following graph from FRED, which shows M1, the narrowest of the monetary aggregates, and the one most perfectly controlled by the Fed (see the chart on his post)
So during one of the lowest points for the US economy in decades, only the North Korean counterfeiting machine was doing anything to keep the money supply loose.
Point: the Fed is no longer pumping out the money. It obviously views financial markets as stable enough, but that leaves so many questions unanswered. What about toxic assets? Defaults? Credit? Regulation? We will see when Ben gets in the hot seat (once more) next week.

Rebecca Wilder


  1. obviously. why do you think bonds are rallying and oil is falling? the FED is not "validating" the "current price" level.

    but as the tenent states: no money supply figure standing alone is adequate as a "guide post" to monetary policy. & the transactions velocity of money is slowly rising.

  2. Hi Flow5-

    Is the velocity of money slowly rising? I know that the money multiplier is still very, very low. I plan to look at velocity that when Q2 GDP is released. I guess that nominal GDP is stabilizing...


  3. I don't follow income velocity. Friedman's calculation is a contrived figure.

    The turnover rates I used, and extrapolated, were published in a payments study (2006). They are not currently valid either, but I still tried to apply those rates-of-change to the current deposit types. I multiplied the turnover figures by the current deposit categories and their volume. I then applied the product to the rates-of-change for the fixed lags (real growth & inflation).

    This type of analysis was used in the 80’s. See: Divisia Aggregates. (Dr. William Barnett) & Debit-Weighted-Money-Index (Dr. Paul Spindt).

    It doesn't matter because the new rates-of-change in monetary flows have now reversed and accelerated again.

    The FOMC keeps “fine tuning” their policy response to ever changing market conditions. I.e., the FED is currently following a very “easy” monetary policy. On a rate-of-change basis, it is currently the most liberal yet.

  4. Monetary lags are fixed but their rates-of-change vary. The economy falls off a cliff in the 3rd qtr.

  5. Contrary to the economic fraternity monetary lags are uniformly fixed in length. The statistical analysis of these crests and troughs are not random. The rates-of-change in these monetary lags (for real-growth, & for inflation), literally oscillate (along the Y axis), between their maximum and minimum levels (as demonstrates by the clustering on a scatter plot diagram).

    These oscillations do however suffer from errant data. Errant data may originate from faulty theoretical interpretations, flaws in the data’s definition, and errors in the computation, collection, and reporting of data.

    It is instructive that the FED has never cooperated by supplying continuous, comparable, and timely data. Supporting data is required for the proper investigation, the subsequent proof, and ending conclusion, for any economic research (“History is full of bad jokes”).

  6. The "Recent Payment Trends in the United States" has the figures for money turnover.

    c. 2007

  7. The economy falls off a cliff if the FED doesn't "ease" a lot further. And this will be a good example to show that the Phillips curve doesn't work. We will have high levels of stagflation (business stagnation accompanied by inflation).

    Jan……. 0.45……. 0.57
    Feb……. 0.40……. 0.39
    Mar……. 0.37……. 0.24
    Apr……. 0.40……. 0.35
    May……. 0.38……. 0.36
    Jun……. 0.39……. 0.36
    Jul……. 0.47……. 0.43
    Aug……. 0.45……. 0.23
    Sep……. 0.43……. 0.15
    Oct……. 0.44……. 0.07
    Nov……. 0.43…….-0.08
    Dec……. 0.41……. 0.00