Prior to the early/mid-1990s, the Fed provided weekly growth targets for the money supply, and market participants followed the actual money growth rates relative to those targets with intense scrutiny. Since then, interest in the monetary aggregates has collapsed to effectively nothing, although every decade or so—normally around a recession—interest spikes, before diminishing as the recovery gets underway. This scenario seems no different today, as investors are again witnessing exceptionally strong growth rates in the money supply. In April, M1 increased by 27.5% year-over-year, M2 by 18%, and MZM by 24%, with M1 and M2 well above their historical highs.
This has led to a number of questions: why are these numbers surging in the midst of a major economic recession; if the funds are not flowing into the real economy, are they flowing into the financial markets as excess liquidity; does this mean that the markets are simply being held aloft by the Fed again; and, if so, what happens when this support ends? In this Economics Weekly, we take a look at these concerns.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.