Weekly US money supply numbers are volatile but the latest figures support claims of a significant acceleration. M2 – currency, checkable deposits, time deposits, savings deposits and money market mutual funds – grew by an annualised 22% in the 13 weeks to 8 December, similar to the peak reached briefly in the wake of the 911 terrorist attacks – see first chart.

The pick-up probably reflects the direct and indirect effects of the Fed’s recent shift to more aggressive forms of “quantitative easing”, involving the central bank supplying credit to households and firms as well as additional liquidity to banks.

The Fed has bought $319 billion of commercial paper since October but its plan to purchase $500 billion of agency-backed mortgage securities has yet to be implemented, suggesting a further boost to come. The latter initiative, however, has already contributed to the 30-year conventional mortgage rate plunging below its 2003 trough, resulting in a surge in refinancing applications that may partly explain the M2 pick-up (to the extent that borrowers take the opportunity to increase their loan balances). Interbank swap rates suggest a further fall in mortgage rates – second chart.

The Fed’s statements about quantitative easing have contained no reference to what level of monetary growth is deemed desirable under current conditions. Policy-makers are probably relying in on markets to signal that stimulus is working and may need to be reined back. However, the Fed’s recent actions may have killed off any remaining “bond vigilantes”, who might be expected to provide early warning of the inflationary implications of sustained rapid monetary expansion by pushing Treasury yields higher.