M1: Going Nowhere as of June 2010

Gary North

July 5, 2010

The Federal Reserve System has been in a holding action in recent months. In early 2010, M1 dropped sharply. Then it recovered. Since then, it has just banged around.

This indicates that the Federal Open Market Committee (FOMC) is biding its time. It is not selling off its $1.2 trillion hoard of Fannie Mae and Freddie Mac bonds. It is therefore not "unwinding," as the FED refers to it. But it has also creased buying any new F/F debt, as the FED said it would not.

The M1 money multiplier fell off a cliff in 2008. In recent months, it has remained flat, as has M1.

The Treasury continues to sell debt at an unprecedented rate, but it is not selling it to the Federal Reserve. Lenders still are content to buy short-term T-bills at less than two-tenths of a percent per annum.

The Federal Reserve is under no external pressure to increase the monetary base. It has not. It hiked it early in the year, then reduced it. It is close to where it was in November 2009.

The FED is seemingly not concerned about imminent price deflation. It is holding to an anti-inflationary policy. With monetary policy flat, consumer prices flat, the job market flat, and the economy officially growing weekly, we can conclude that the FOMC is deliberately doing nothing to rock the boat. It is "steady as we go."