Money Supply Expansion Supports Economic Growth — Evening Brief – 10.11.24

There are several reasons for downplaying the recent recession warnings. One was the much stronger-than-expected increase in September payrolls, along with encouraging manufacturing prints, last week. Another is the rebound in annual U.S. money supply growth.

In February, the average one-year change for numerous money supply metrics resumed its upward trend. However, the gains have been modest. This began to shift during the summer, and in August the trend exceeded 1% for the first time in more than two years.

Of greater significance is that the average velocity of money supply growth has increased by 1.1% year over year, which concludes an 18-month period of contraction. It is important to note that the economy continued to expand during that lack of money supply expansion.

Another aspect that bolsters stronger future economic activity is the return of a potentially stronger economic growth trend, which is expected to persist and potentially accelerate in the near term.

The resurgence of money supply growth aligns with the Federal Reserve’s 50-basis point interest rate reduction last month, marking the inaugural cut in the federal funds rate since the central bank commenced interest rate hikes in March 2022. The gradual and subsequently rapid increase in money supply growth prior to the interest rate reduction indicated an impending shift towards a dovish policy stance.

The expansion in money supply refutes the prevailing belief that the risk of recession is escalating. The latest data on money supply trends confirms that the US macroeconomic growth trajectory is favorable and may be intensifying.

The prospect of an additional half-point interest rate reduction by the Federal Reserve has diminished. This morning, Fed funds futures indicate an 87% likelihood of a quarter-point reduction at the upcoming FOMC meeting on November 7.

Meanwhile, some analysts are starting to question if the central bank cut interest rates too much last month, or if a cut was even necessary.

“With the benefit of hindsight, the 50-basis point cut in September was a mistake though not one of great consequence,” former Treasury Secretary Larry Summers wrote last week. “Today’s employment report confirms suspicions that we are in a high neutral rate environment where responsible monetary policy requires caution in rate cutting.”