01 October 2022

The US can weather another interest rate hike

Until a couple of years ago I used to regularly post graphs of the monetary measure that I called Corrected Money Supply (CMS). An important part of this measure was that it estimated the amount of precautionary savings held in M1 deposits and subtracted that to arrive at an accurate measure of money. The logic was that such precautionary holdings are not intended to be spent and hence do not qualify as money.

Then in May 2020 the Federal Reserve Board merged savings and other deposits into M1, after which my old measure ceased to work. Recently I discovered that the Fed has a new series for savings deposits (https://fred.stlouisfed.org/series/MDLNM) beginning from June 2020, the month after which it changed its definition of M1.

Using the new series, I subtracted savings deposits from the new M1 to achieve continuity with the old M1 series. The results were quite surprising. In August YoY growth in Corrected Money Supply was running at 40%, suggesting that another rate increase would probably not push the US economy into recession. The graph below shows the figures. It also underlines why monetary aggregates are very important.

I do not believe that increasing interest rates will help reduce inflation. But reducing interest rates to near-zero levels merely inflates asset bubbles without boosting the real economy. Increasing interest rates now will prevent bubbles which then have to be punctured. Nevertheless, the Fed would be advised to moderate the quantum of its rate increases.

Category: Economics

Philip George
Understanding Keynes to go beyond him

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