Current US inflation situation

Capital Spectator comments on the release of the FOMC minutes yesterday as follows:

"For good or ill, the Fed pays close attention to core CPI, and so the future path of interest rates may very well be determined by this inflation gauge. With that in mind, over the 12 months through February, core CPI rose by 2.7%. Not only is that near the highest level in years, it's also well above the Fed's comfort zone. "On a twelve-month-change basis," the Fed minutes advised, "core CPI inflation in February was considerably above its pace a year earlier, largely because of a sharp acceleration in shelter rents over the past year.""

The minutes also state "the unemployment rate edged down from 4.6 percent in January to 4.5 percent in February."

Likely as a result of this information, the conclusion of the FOMC meeting was recorded as:

"At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: “The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/4 percent.”

The vote encompassed approval of the text below for inclusion in the statement to be released at 2:15 p.m.:

“In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”"

I would strongly recommend reading the FOMC minutes each time they are released.


Here is a recent chart of M2 from Capital Spectator...














and a chart of M1 and M2:













So the amount of money Americans have either under the mattress or in their checking accounts has been flat for over two years, while they have been putting cash into short term savings accounts(see Wikipedia's entry on Money Supply for definitions of M1 and M2). That makes sense, as you want to earn some interest if you can, even if you're planning on spending the money soon.

It makes sense to me that the Fed stopped reporting M3, because M3 just adds eurodollars and repurchase agreements to M2. Since Eurodollars are deposits denominated in United States dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve, why report something you can't control?

Wikipedia's discussion of repo's and the Fed is as follows:

"In the United States, as of 2006 the Fed sets an interest rate target for the Fed funds (overnight bank reserves) market. When the actual Fed funds rate is higher than the target, the desk will usually increase the money supply via a repo (effectively lending). When the actual Fed funds rate is less than the target, the desk will usually decrease the money supply via a reverse repo (effectively borrowing).

In the U.S., the Federal Reserve (Fed) most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money. Alternatively, it may permanently create money by the outright purchase of securities. Very rarely will it permanently destroy money by the outright sale of securities. These trades are made with a group of about 22 banks or bond dealers who are called primary dealers."