No Sign Of Tapering In Base Money Supply Data

The inflation-adjusted year-over-year pace in so-called high-powered money—M0, as some label it—is rising at the fastest rate since 2009, when the Federal Reserve was winding down its initial monetary response to the Great Recession. The news that the growth in base money--a slice of money supply that the Fed controls directly--is accelerating arrives during a new round of chatter that the central bank will soon begin tapering its asset-buying program in the wake of last week's upbeat economic reports. Some analysts now predict that a tapering announcement could come as early as next month, at the next FOMC policy meeting. Maybe, although a new Bloomberg survey advises that economists overall expect that the March 2014 meeting is the more likely date for a change in the monetary weather. Meanwhile, there’s nary a hint of tapering in the latest base money data. In fact, it looks like monetary policy stimulus is becoming more aggressive, or so the current numbers show.

Why should we pay attention to base money? A quick review of history offers an answer. As the first chart shows, the monetary base (measured in real annual changes) tends to contract on the eve of recessions. The comparison below ends at December 2007, at the start of the Great Recession. Not surprisingly, the real monetary base annual change was negative by nearly 3% at 2007's close, which marked the start of the worst economic downturn since the Great Depression. In short, inflation-adjusted base money changes are a valuable tool for tracking the business cycle, which is why this data is included in the Capital Spectator's Economic Trend & Momentum Indexes.

Now let’s look at how the monetary changes compare through last month, October 2013. Due to the increased magnitude of fluctuations during and after the Great Recession vs. history, it’s easier to see the trend by reviewing the last several years on a separate chart. The real monetary base has been increasing at a faster rate this year, rising nearly 36% for the 12 months through October. For the moment, the trend in base money implies that the accommodative monetary policy of late is picking up speed.

Some economists say that base money is no longer a reliable indicator of monetary policy in an age when the central bank is knee-deep in extraordinary efforts to juice economic growth. That’s a debatable point. In any case, the great experiment in monetary policy that currently defines real-time events is far from settled terrain in terms of what it means for analyzing the numbers for clues about the business cycle. As such, it’s premature to dismiss base money’s signals. On that note, base money is telling us that there’s no sign of tapering at the moment. It’ll be interesting to see how, or if, this indicator’s message changes once the tapering begins. For now, it’s full speed ahead.