Martin Wolf writes that “calibrating monetary tightening is particularly difficult today, as it involves raising short-term rates and reducing [central bank] balance sheets at the same time” (Notice of August 31).
Wolf had said earlier in the same article that “lack of attention to monetary data” partly explains why central banks have persisted with “ultra-loose policies for too long.”
Arguably, monetary data gives central banks a method to gauge the right levels of their main instruments to achieve inflation targets. These instruments include debt management policies, where these policies today tend to be called “quantitative easing” and “tightening”, as well as the fixing of short-term rates.
Indeed, the rapid growth of broad money was one of the considerations that alerted Wolf to the potential dangers of inflation in a remarkably insightful article in May 2020 – “Why Inflation Might Follow the Pandemic” (Opinion, May 20, 2020).
A remarkable feature of the US economy right now is that broad money growth has come to an almost complete halt, as one of Wolf’s charts shows. Using M3 figures prepared by the Shadow Government Statistics consultancy (and mostly derived from Federal Reserve figures), the quantity of money grew by less than 1% in the six months to July. With inflation continuing at about eight times the rate, real money balances are squeezed. The stock market is down, activity in the housing market has fallen and others
forward-looking indicators turned negative. If the Fed follows its announced plans and increases asset sales again, monetary stagnation could be followed by an outright fall in the quantity of money.
Under these circumstances, it is far from clear that further significant increases in the fed funds rate are appropriate. Today’s inflation is the result of unduly large asset purchases by the Fed and excessive monetary growth from the spring of 2020 to the end of last year.
We have to hope that deflation in 2024 and 2025 is not the result of excessively large asset sales by the Fed and monetary contraction from the summer of 2022.
A small and stable, but always positive, growth in the quantity of money is the ideal.
Professor Tim Congdon
President, Institute for International Monetary Research, University of Buckingham Buckinghamshire, UK