Bobby:
What do you make of this:
economeister.com
FED SOURCES: MONEY GROWTH ANOTHER WORRISOME
STRAW IN WIND
By Steven K. Beckner
WASHINGTON (MktNews) - Ongoing upsurges in the money supply continue to worry the
Federal Reserve -- not in isolation, but because they have coincided with other worrisome
economic and financial indicators.
Softer-looking March economic data have given the Fed some comfort, but sources have
indicated they need to see further confirmation of a slowing in domestic demand and/or a greater
drag from Asia.
In the week ending April 6, the M2 monetary aggregate grew $22.4 billion, leaving its annual
growth rate relative to the fourth quarter of last year at 8.3%, compared to a Fed target growth
range of 1% to 5%. M3 rose $32.8 billion for an 11.8% growth rate, compared to a 2% to 6%
target range. Once declining M1, which the Fed no longer targets, was up $7.7 billion and is now
growing at a 3.0% rate.
A variety of explanations have been offered for the strength of money growth, including
mortgage refinancing activity and seasonal tax factors, and the Fed is hopeful that in coming
months money growth will moderate.
However, none of the explanations for rapid money growth are seen as completely
satisfactory to Fed officials, given the accompanying strength of economic and financial activity.
And they are not confident money growth will slow sufficiently.
Few at the Fed put primary importance on the monetary aggregates, but sources say they
have been getting increased attention because they ring true with what other economic and
financial indicators have been signaling. It would be unwise, sources said, to simply explain
outsized gains in money supply away.
Rapid money growth, taken together with expanding credit aggregates, aggressive lending,
strong growth in interest-sensitive sectors and soaring stock prices, may be a danger sign that
the Fed has become too accommodative of demand by leaving the federal funds rate at 5.5%.
If the federal funds rate were floating instead of pegged, it and other short-term interest rates
would be rising to reflect strong credit and economic demand, sources note, but by leaving the
funds rate unchanged, the Fed is supplying as many reserves as banks demand to hold the funds
rate steady.
Officials acknowledge that market rates, for the most part, have not risen much and that the
real federal funds rate has risen. But they warn that relatively flat market rates may have been
suppressed by unsustainable forces such as unexpectedly low oil and other commodity prices,
better behaved medical costs and the Asian financial crisis, which has combined with dollar
appreciation to hold down import and other prices while prompting capital inflows into U.S.
instruments.
If demand has not slowed and utilization rates have not dipped when these "favorable supply
shocks" inevitably begin to evaporate, inflationary expectations and actual inflation pressures are
apt to mount, pushing market rates higher, sources predict. In those circumstances, if the Fed
continues to allow rapid money and credit growth by holding the funds rate at 5.5% it will be
throwing fuel onto the fire, they say.
Sources indicate they are willing to wait awhile longer in hopes that the economy will slow on
its own, alleviating these pressures, but are not prepared to wait a lot longer.
This view is becoming increasingly widely held among members of the Federal Open Market
Committee.
Sources further indicated they will have to carefully calculate the likely impact of any
short-term rate hike on bond yields and on the stock market, recognizing the potential for a first
move toward tightening to have a disruptive effect. They hinted any initial move might take the
form of 25 basis points.
Although March housing starts were reported down 2.8% in March, this was a smaller drop
than expected following a 6% jump in February. The 0.1% ex-auto rise in March retail sales
reported earlier in the week was also as expected. Much weaker, on the surface, was the 36,000
drop in March non-farm payrolls, but the report also showed continued strength in hours worked
and average hourly earnings. Sources indicated they will require considerable further evidence of
slowing before they will feel comfortable.
** Market News Service Washington Bureau: (202) 371-2121 **
[TOPICS: MNSFED]
08:15 EDT 04/17
Live long and prosper,
Little joe |
