For those of us seeking relief from the hot air in Washington and the rest of the country, it comes in a little- noticed bounce in the money supply statistics. The Fed’s latest estimates for M2, in its H.6 release on July 21, shows the growth rate for the past 3 months at 8.2 percent; the past 6 months at 6.8 percent; and the past 12 months at 6.0 percent. These numbers are a welcome increase from the 5 percent level they were all stuck at throughout the recent round of quantitative easing.
The Fed’s bond purchases fed the banks’ appetite for excess reserves, but didn’t give them enough to stimulate sufficient lending and investing to push up the rate of money growth. They were sufficient to produce 5 percent money growth, but not more. That doesn’t mean they did no good since one must presume banks would have held onto their reserves even tighter had the supply not been increased.
Measured by short term interest rates, Fed policy has been super easy “for a considerable period.” Measured by money growth, however, Fed policy has been overly tight for the circumstances. The recent pick-up in money growth is a welcome sign that banks are finally beginning to use their excess reserves to make money creating loans and investment. If money growth continues its acceleration for a prolonged period it will finally trigger the beginning of the long-awaited exit strategy of withdrawing reserves to offset the growth of the money expansion multiplier. But, meanwhile, let’s enjoy the long overdue stimulus to the economy.