It’s Still About the Money

The Federal Reserve will meet this week and announce its decisions on Wednesday. As of the close on Friday, the futures market indicated about a 30% chance of the Fed raising short-term rates by a quarter point, with about an 85% chance the Fed raises rates by a quarter point by the end of the next meeting in late July.

We believe another rate hike is likely coming in late July, but also think investors should be more focused on what has been happening lately to the money supply. No matter how you cut it the Fed has finally gotten tight. Through April, the relatively narrow M1 measure of the money supply has dropped thirteen months in a row. The broader M2 measure, which we have followed the most, has dropped nine months in a row and is down 4.6% from a year ago.

Some careful observers have noted that the M2 measure of money does not include large time deposits (such as CDs above $100,000). But larger time deposits are included in the M3 measure of money, which the Fed stopped producing in 2005, but is still tracked by an international group (the OECD) and can be found online in the St Louis Fed’s FRED database. That measure is down 4.1% from the peak last July.