A previous post drew attention to a sharp pick-up in US narrow money M1 – currency and checkable deposits, adjusted for flows into sweep accounts. This acceleration continued in November, with the annual rate of change reaching 13%.
Broader aggregates are also now showing signs of improvement. Annual growth of M2 – M1 plus savings deposits, small time deposits and retail money funds – rose to a five-year high of 7.6% in November. Over the last 13 weeks M2 has risen at a 17% annualised rate – see first chart.
The M2 acceleration may partly reflect the Fed’s recent purchases of commercial paper – $312 billion since October – and plans to buy mortgage-backed securities should give a further boost. The latter initiative has contributed to a sharp fall in mortgage rates and a surge in refinancing applications – second chart.
Milton Friedman’s old rule of thumb is that the money supply leads the economy by about six months and inflation by about two years. The recent pick-up, if maintained, suggests the economy will hit bottom some time in early 2009, while fears of sustained deflation are unwarranted.
