The Fed: facts and fiction on money supply

21 Jan 14
Christopher T Mahoney

The Federal Reserve denies that it has been tightening US money supply when the statistics suggest it clearly has. An explanation is needed to both Congress and the American people

One thing that puzzles me about the US Federal Open Market Committee is the lack of discussion about the monetary aggregates.

Since one of the purposes of quantitative easing is to grow the money supply, you’d think that an important agenda item would be a review of the pace of money growth. This subject is always discussed at the European Central Bank’s meetings, and ECB president Mario Draghi always reviews the data in his press statement (no matter how dire).

The committee's staff report mentions M2 growth in passing, but the committee moves on without any recorded discussion. This is inexplicable, given the of money growth since the crash, and especially in view of recent alarming trends.

Money growth has been for the past two years, as has M2 . Given the quantity equation, we know that when M2 growth and M2 velocity decline, nominal growth declines arithmetically. The Federal Reserve has been tightening for two years, resulting in declining and .

This is hard to understand. What is even more alarming is that money growth has recently sharply, and is now running below 5% - the slowest rate of money growth since the crash itself.

What is going on? Why has the Fed been tightening for two years, and why has it allowed inflation to undershoot the target by such a wide margin?

Here is what the FOMC says on the subject: ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’ (Minutes, 18 Dec. 2014)

In other words, the Fed flat out denies that it has been tightening. It asserts that it is providing ‘a highly accommodative stance of monetary policy’. I think that someone should buy the FOMC members some subscriptions to FRED (Federal Reserve Economic Data). It could be quite eye-opening.

In seriousness, the Fed must know what I have just observed from its own database. But why won’t the FOMC publicly address the issue? Shouldn’t the ‘most transparent Fed in history’ explain to Congress and the people why it is tightening when it says it is not?

Christopher T Mahoney is a former vice chairman of Moody’s. This post first appeared on his

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