From The Capital Spectator:
The Federal Reserve’s narrowest gauge of money supply (measured in
real or inflation-adjusted terms) posted a fractional gain in August vs.
the year-earlier level – the first positive year-over-year reading
since February 2016. The return of annual growth for the monetary base
suggests that the central bank may be laying the groundwork to slow or
even reverse its recent efforts to tighten policy.
Recall that real M0’s annual trend offered an early sign in 2015
that the Fed was moving toward hiking interest rates for the first time
in nearly a decade. Later that year, in December, the central bank announced that it was raising the target range for the federal funds rate. The central bank has increased rates several times since then.
In the nearly two years since that first hike, real M0’s annual trend
has been mostly negative, with a downside bias that reached a trough in
Oct. 2016 via a 13.4% year-over-year decline — a 68-year low.
Over the subsequent months, the annual decline’s depth has been easing,
ticking above zero in August for the first time in 19 months. Is that a
sign that the Fed’s recent program of tightening monetary policy is
downshifting or perhaps in the early stages of reversing? It’s too soon
to know for sure, but M0 data deserves close attention in the months
ahead.
Meantime, what might convince the Fed to rethink its recent bias for
tightening policy? Relatively muted inflation is probably a factor. In
fact, the latest numbers through August show that the core measure of
the personal consumption expenditures index – the Fed’s preferred
inflation gauge – continued to decelerate. The annual change in core-PCE
eased to 1.3% through August, the softest pace since Nov. 2015. The
sliding trend serves as a reminder that the Fed’s 2% inflation target
has become increasingly elusive this year....
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