US Money Supply Growth – Bouncing From A 12-Year Low

Nevertheless, as the recent pace of demand deposit growth indicates, the effect is mitigated by accelerating bank credit growth and the fact that the Fed is expanding its balance sheet again.

As of September, growth in demand deposits and total bank lending has accelerated to 6% y/y and 6.6% y/y, respectively.

As an aside to this, the Fed’s balance sheet is actually expanding since July. In other words, the recent announcement of upcoming “reserve management/please don’t call it QE” activities seems to have been in reference to a process that has been underway for some time already. 

Don’t call it “QE” – the Fed’s balance sheet flip-flops from shrinking to expanding.


Mind the Lag

As mentioned above, the effects of decelerating and/or accelerating money supply growth on the economy and financial markets tend to arrive with a lag. As this lag is variable, it is not possible to time the arrival of these effects with precision. Moreover, the demand for money plays a role in the context of asset valuations as well.

As the long-term chart of TMS-2 growth above indicates, multi-year lows in y/y money supply growth rates have preceded the last two recessions and the associated bear markets. While the downturns played out, money supply growth was actually re-accelerating, as the Fed intervened. A rebound in economic activity and asset prices followed with a lag.

At present, the stock market still trades close to its highs and credit markets are seemingly placid. And yet, the first cracks are actually beginning to show up in certain areas of the credit markets. We will post an update on recent developments in this market segment shortly.

Charts by, data by St. Louis Fed

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