| Time Range | Change in Money Supply | Change in Personal Consumption Expenditure | Change in Effective Federal Funds Rate |
| January 2023 to January 2024 | +9.66% | +2.5% | +23.09% |
| February 2023 to February 2024 | +10.81% | +2.5% | +16.63% |
| March 2023 to March 2024 | +5.59% | +2.7% | +10.35% |
| April 2023 to April 2024 | +3.26% | +2.7% | +10.35% |
| May 2023 to May 2024 | +2.79% | +2.6% | +4.92% |
Sources: Board of Governors-Federal Reserve System. Federal Reserve Bank of New York. U.S. Bureau of Economic Analysis.
To be political in the United States is to approach political parties like an activist investor. The current split political regime in America has settled on a consensus personal consumption level of two percent. In other words, the political and banking systems of the United States have agreed that a two percent increase in price levels is appropriate for moving capital through the nation’s various markets.
The United States is not quite at two percent per annum increase in price levels. Over the last four months, the personal consumption expenditure index has averaged 2.575%. This means that on average, price levels have increased on an annual average of 2.575%. This level is being maintained even as the rate of inflation i.e., rate of change in money supply, has been falling over the same four-month period.
As the above chart shows, over the last four months, increases in the monetary base peaked during the February 2023-Februrary 2024 period, according to data from the Board of Governors of the Federal Reserve System. While the markets are seeing increases in monetary base (money supply), the rate of increase in the monetary base is slowing down., falling from a peak of a 10.81% increase in the February 2023-February 2024 period to the current 2.79% increase during the May 2023 to May 2024 period.
Also, the effective federal funds rate, the overnight rate at which banks lend each other excess reserves, has increased 100 basis points since January 2023, from 4.33% to the current 5.33%. There have been whispers that the Board of Governors should consider increasing the target inflation rate from two percent to three percent to claim “mission accomplished” when it comes to combatting inflation. The stickiness in PCE may be the rationale for this argument.
Americans are understandably focused on changes in price levels for goods and services. One of my pet peeves is confusing changes in consumer price levels with inflation. Inflation is about changes in money supply. Changes in price levels is the result of changes in money supply. Where there is more money in the markets, consumers will experience increases in prices because more money is available for bidding up prices.
Congress and the Administration are tasked with managing the value of the currency, and to keep the value of the currency attractive need to sustain interest rate levels that attract capital and investment. For Americans concerned about developing domestic businesses or job creation in the U.S., this nationalist approach may be more attractive. The nationalist approach may also be more attractive to the Administration and Congress when it comes to attracting votes. Job creation, from a narrative perspective, catches the voters’ ears.
But is the Board of Governors of the Federal Reserve System interested in vote getting? No, in part because it is a non-partisan agency. It is also part of a hybrid public and private system where its private members, commercial banks, are interested in the inverse relationship between lower rates and higher asset values. And for bank customers or investors, lower borrowing rates and higher valued collateral may result in acquiring more credit that can be invested outside of the U.S.
As a trader, are you nationalist or globalist in your view?
For more of my view on the American political economy, buy my book at amazon.com/author/altondrew.
Alton Drew
6 July 2024
Lawyers Write the Bets. Bankers Sell the Bets. 