Fed Minutes Highlight Inflation Concern At Time Of “Elevated Uncertainty”
The Federal Reserve remains concerned about inflation while M2 money supply growth continues to accelerate in year-over-year terms.
By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com
Inflation was on the minds of Federal Reserve members at the Jan. 28-29 monetary policy meeting.
“Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate,” the minutes show.
Stalled progress on reducing inflation appears to be the main impediment for continuing rate cuts. The Fed has reduced its target interest rate twice in the second half of 2024, but paused at last month’s policy meeting. The decision to stand pat aligns with last week’s news that consumer prices edged higher in January via year-over-year terms, while the ongoing rebound in the annual pace of the money supply may be a factor in keeping inflation above the Fed’s 2% target.
The chart below compares broad money supply (M2), advanced 12 months, against headline consumer inflation. The recent rebound in M2 growth suggests that an inflationary tailwind may be brewing via policy. M2 rose 1.3% in early January vs. the year-ago level. Although that’s relatively modest by historical standards, the recent directional trend change from negative to positive implies that money supply is no longer a source for slowing pricing pressure and may start to be a factor in fueling stronger pricing momentum.
In recent years, central bankers have generally downplayed if not dismissed money supply’s influence on inflation. At a discussion yesterday at Princeton University, for example, Alan Blinder (a former vice chair of the Fed) and William Dudley (former New York Fed president) responded to my question on the relevance of M2 for future inflation; they said there’s a mixed record, at best, for using money supply as a predictor and that the correlation overall was unstable. They conceded a small point, however, and said that there are times when M2’s influence appears relatively strong(er). The question is whether we’re in one of those periods now?
Perhaps it’s reasonable to note that M2’s rebounding growth trend is only one emerging risk factor for the Fed’s still-unfinished goal of reducing inflation to (or near) it’s 2% target. Meanwhile, there’s an optimistic view that focuses on indicators that look increasingly helpful for slowing inflationary momentum. Notably, shelter inflation and wages were key drivers of the inflation surge in 2021-2022 and both have been easing recently in year-over-year terms — a bias that suggests inflation overall will resume downshifting in the months ahead.
The challenge is that President Trump’s policy agenda — tariffs, in particular — may undermine if not overwhelm disinflationary support from wages and shelter costs. Much depends on the degree and breadth of the tariffs, and how foreign governments respond.
The Fed, meanwhile, remains on pause for policy changes and is looking for more clarity on how the White House’s tariff plans play out. TMC Research’s Fed Funds Model suggests the central bank can be patient, at least for now. The model currently indicates that the effective Fed funds rate is nearly in line with the model’s estimate for an equilibrium rate. In other words, the Fed funds rate is more or less appropriate for current conditions. But given fast-moving events in Washington lately, the definition of “appropriate” could evolve quickly.
The Fed admitted as much in the latest minutes, noting the “elevated uncertainty regarding the scope, timing, and potential economic effects of possible changes to trade, immigration, fiscal, and regulatory policies.”
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