Reuters: Keep an Eye on the Money Supply

U.S. inflation roller coaster prompts fresh look at long-ignored money supply

By Michael S. Derby

NEW YORK – The amount of money sloshing around the U.S. economy shrank last year for the first time on record, a development that some economists believe bolsters the case for U.S. inflation pressures continuing to abate.

The Federal Reserve’s main measure of the nation’s money stock – known as M2 money supply – slid for a fifth straight month in December, dropping by a record $147.4 billion to a seasonally adjusted $21.2 trillion from the month before, data from the U.S. central bank released this week showed.

paper published this month by the Mercatus Center at George Mason University said that economists and policymakers would do well to keep an eye on money supply measures in the future.

“Money has all but disappeared from monetary policy analysis,” given the economics profession’s emphasis on the view monetary policy works by managing expectations about the future path of interest rates, wrote Joshua Hendrickson of the University of Mississippi. Given money supply’s better-than-expected track record on recent inflation issues, ignoring these numbers has been “misguided,” he said.

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