Market expectations were for a quarter of a percent rate hike from the Federal Open Market Committee, and some vague language that indicated the possibility of future rate hikes but did not commit to one.
One thing Fed Chairman Jerome Powell probably won't be hearing on Wednesday is the money supply. The money supply is off the scales as a way to predict future inflation when changes in the money supply stop moving in line with GDP growth and inflation, but the big spike before the current price increase has given monetarists a new direction.
Scott Grannis, the longtime chief economist at Western Asset Management who is now the author of the Calafia Beach Pundit blog, has compiled a chart, republished here, showing how the M2 measurement of the money supply leads inflation, with a lag of about one year.
“The chart strongly suggests that the CPI is heading towards zero in the next 6-9 months. Therefore, it is reasonable to conclude that the Fed has acted appropriately, albeit belatedly, and is not required to be stricter; lower inflation is 'ready' at the moment," he said.
Regarding the deficit, Grannis argued that while the COVID-era spending spike was financed by printing money, the latest spike is not worrisome. "So there is no reason to worry about the rise of inflation extended by excessive M2 growth," he said.
He's also not worried about the overall economy, noting the recent uptick in US consumer confidence. “This supports my old argument that there is no reason to worry about an impending recession. The economy is likely to continue to grow for the foreseeable future, even at the usual 2% rate or maybe a little less,” he said.
The team at Hoisington Investment Management Co. also places great emphasis on the money supply. "Negative money growth, rising fiscal deficits, rising real interest rates, and central bank guidance of higher short-term interest rates are creating a classic 'credit crunch,'" they said in their second quarter outlook.
They put together this chart of other deposit liabilities, which is all deposits in banks minus term deposits and which ends up being a good substitute for the M2 gauge. Adjusted for inflation, the ODL has been negative for the past 36 months, and the rate of contraction over the 12 and 24 months has accelerated. "The pile of money created in 2020-2021, which supported spending and inflation, has been wiped out," they said.
The S&P 500 ended at a 15-month high on Tuesday, but stocks looked weaker ahead of the Fed decision. The dollar also traded weaker.
