Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

The Fed Follows Trump's Tweets, And Does The Right Thing

Interest-Rates / US Interest Rates Mar 24, 2019 - 11:35 AM GMT

By: Steve_H_Hanke

Interest-Rates

Earlier this week, the Fed left its target Fed funds rate unchanged at 2.25-2.50%. In addition, the Fed indicated that it had turned dovish. Rather than two Fed funds rate hikes in 2019, the Fed has now signaled that there will be none. And that’s not all. Starting in May, the Fed will reduce its balance sheet unwind of its Treasury holdings to $15 billion per month from $30 billion, and that it will end the unwind in September.

All this dovishness must have warmed the cockles of President Trump’s heart. For some time, Trump has been targeting the Fed with Twitter storms that have complained that the Fed has been too hawkish.

Well, the Fed apparently saw what the President saw. Or, maybe not. After all, one line of argument used to support the Fed’s new dovish stance is that the stance is necessary given the uncertainties that abound—both at home and abroad (read: regime uncertainties being created by President Trump himself).


In adopting its new dovish stance, the Fed has done the right thing. At least, that’s what the data show. Forget the President’s Tweets. Let’s run the analytics:

Did the Fed do the right thing? To answer that question, we must look at the money supply, broadly measured. Indeed, for me, a monetary approach to national income determination is what counts. The relationship between the growth rate of the money supply and nominal GDP is unambiguous and overwhelming. For example, just consider the U.S. from 2003 to 2018. The money supply (M4) grew at an annual rate of 3.59% and nominal GDP grew at a 3.62% annual rate.

So, what is the current U.S. monetary temperature? Let’s first determine the “golden growth” rate for the money supply, and then compare the actual growth rate of the money supply in the U.S. to the golden growth rate. To calculate the golden growth rate, I use the quantity theory of money (QTM). The income form of the QTM states: MV=Py, where M is the money supply, V is the velocity of money, P is the price level, and y is real GDP (national income).

Let’s use QTM to make some bench calculations to determine what the “golden growth” rate is for the money supply. This is the rate of broad money growth that would allow the Fed to hit its inflation target. I have calculated the golden growth rate from 2004 to the present.

According to my calculations, the average percentage real GDP growth from January 2004 to the present was 1.91%, the average growth in Total Money Supply (M4) was 3.86%, and the average change in the velocity of money was -0.61%. Using these values and the Fed’s inflation target of 2.00%, I calculated the U.S. golden growth rate for Total Money (M4) to be 4.52%.

______

Calculations:

Golden Growth Rate = Inflation Target + Average Real GDP Growth – Average Percentage Change in Velocity.

U.S. Golden Growth Rate = 2.00%. + 1.91% - (-0.61%) = 4.52%

______

So, the growth rate of money supply (M4), which has been 3.86%, has lagged behind the golden growth rate of 4.52% (see my calculations and the chart below). This suggests that, on average, there has been tightness on the part of the Fed over the 2004-present period. But, at present, the growth rate of M4 is 4.54%/year, which is almost right on the golden growth rate of 4.52%/year.

Not surprisingly, the current Fed monetary stance has produced a current growth rate in nominal aggregate demand measured by final sales to domestic purchasers of 5.02%/year, as shown in the chart below. So, the current money supply growth is very close to the golden growth rate, and aggregate demand is where we would expect it to be. Everything appears to be calm and in the “strike zone.”


So, why did the Fed turn dovish? It’s all about regime uncertainty. As it turns out, the Fed is watching President Trump, and it has determined he is a loose cannon—one that creates regime uncertainty. Indeed, the President’s unanticipated zigs and zags create a pervasive uncertainty in both the national and international economic scene. In consequence, the Fed has lowered its economic forecasts and has wisely decided to play it safe.

By Steve H. Hanke

www.cato.org/people/hanke.html

Twitter: @Steve_Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2019 Steve H. Hanke - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Steve H. Hanke Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules