Pause...For Now

The Fed kept rates unchanged at today’s meeting, but whether they are done with rate hikes or simply at a pause is yet to be determined.
Today’s Fed statement itself was mostly a copy/paste of September, with some minor wording changes noting that the economy is growing at a “strong” rather than “solid” pace, and employment gains have “moderated” rather than “slowed”. The only new information came with the addition of “financial” conditions to previously noted credit conditions as factors weighing on household and business activity.

At the press conference, Chairman Powell noted two primary factors that seem to be weighing on Fed decision making. The first is the tightening in financial conditions, as higher rates on everything from mortgages to corporate borrowing will have an impact on activity moving forward. The second – and related – factor is that the Fed thinks the full effects of policy actions to-date have yet to be fully felt.

In our view, the Fed is watching the wrong metrics. It should be paying more attention to the money supply, which is signaling that it is already tight. The M2 measure has declined in eleven of the last fourteen months, has contracted 3.6% in the past year, and is down 4.4% off the peak in July of last year. Meanwhile, bank credit at commercial banks as well as their commercial and industrial loans are both flat to down. If this isn’t tight, we’re not sure what tight means.