MONETARY POLICIES


FX


that M2 money supply growth has decelerated into 17 of the last 21 recessions (since 1900) and that the totality of monetary policy can explain the four occasions when money supply did not decelerate into recessions.


current conditions, then the situation has to be more nuanced that “ah, rates are too low for a recession to occur”.


Chart 1 is from the excellent Lacy Hunt of Hoisington Investment Management. His thesis (and we are massively simplifying this) is


In chart 2, we plot the Fed Funds rate and the US yield curve alongside the year over year percent change in M2 and stock prices (shaded areas = recessions). What we are trying to show here is a more complete look at monetary policy than purely interest rates, which of course remain at a low nominal reading of 2%. This shows that prior combinations of Fed tightening, as shown by Fed rate rises, decelerating money supply growth and a flattening of the yield curve are a powerful force and apparent prior to recent recessions.


Where are we today? Well, the Fed will continue


to raise rates Chart 1 – M2 Money Stock Annual % change


until something changes (most likely something untoward in the financial markets in our opinion) M2 money supply growth is decelerating noticeably and the yield curve continues to flatten. We are of the view that these monetary levers need to tighten further prior to a recession, and that we will likely see the yield curve flatten well before such an event.


FX TRADER MAGAZINE July - September 2018 45


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