Today, Federal Reserve System governor Adriana D. Kugler reiterated in remarks what we have been hearing from other Federal Reserve Board members: that inflation is still too high, even given the progress on lowering it. Governor Kugler pointed out that inflation is moving down slowly and that easing rates is possible later this year. Like other Federal Open Market Committee members, Governor Kugler noted that the FOMC’s next move will be driven by the data.
The M1 money supply, which consists primarily of cash or cash equivalents that consumers spend, has been decreasing steadily since December 2022, according to data from the Board of Governors-Federal Reserve System. Today, M1 money supply stands at $17,987.1 billion, down from $19,765.0 billion reported in December 2022. This reflects a decrease in the money supply of 8.99%.
American consumers, however, focus on price levels. According to data from the U.S. Bureau of Economic Analysis, prices consumers purchased goods and services at increased 2.5% year-over-year during the periods January 2023 to January 2024 and February 2023 to February 2024. M1 money supply decreased 8.06% during the January 2023 to January 2024 period. During the February 2023 to February 2024 period, M1 money decreased 7.37%.
We see something similar in the data for the periods March 2023 to March 2024 and April 2023 to April 2024. While year-over-year prices increased by 2.7% for both periods, we see a decrease in M1 money supply of 5.12% for the period March 2023 to March 2024, and a decrease in M1 money supply of 3.5% for the period April 2023 to April 2024.
But if the money supply is shrinking, the cost of that supply should be going up. The Federal Reserve may be displaying some effectiveness in its role as regulator of the money supply. During the January 2023 to January 2024 period, the effective federal funds rate, the weighted average of the interest rate banks lend each other their reserves in the interbank market, climbed 100 basis points from 4.33% to 5.33%. The rate of interest the Federal Reserve pays banks to hold back their reserves in their vaults also increased 100 basis points, from 4.40% to 5.40%. These two major tools of monetary policy appear to help reduce supply and drive up rates.
February 2023 to February 2024 saw the same 100 basis point increase in the effective federal fund rate and the interest paid on reserves. The March 2023 to March 2024 period saw 75 basis point increases on the effective fed funds rate and the interest on reserve balances, while the April 2023 to April 2024 period saw 50 basis point increases on these monetary policy rates.
If this data follows its current trajectory, will the FOMC have to reduce interest rates at all this year?
Alton Drew
18 June 2024
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