Despite the Federal Reserve’s well-publicised and much-hated massive dollar creation, money supply actually fell in August.
Thus the Fed still has much room to keep rates ultra-low, which the Federal Open Market Committee will likely do at tomorrow’s meeting.
Regardless of what many may fear, deflation, not inflation, remains the key danger to the US economy. Should the nascent US recovery sputter, this will become even more the case.
Business Week: Paul Ashworth, senior U.S. economist for the economic consulting firm Capital Economics, says it’s “disconcerting” that in August the broadest measure of money fell at an annual rate of 2.2%. That rate comes from comparing the amount of money in the three-month period of June through August to the previous three months. This broadest money measure, known as M3, is no longer officially published by the Fed but is tracked by private forecasters. It includes cash, checking and savings accounts, certificates of deposit, savings and loan deposits, and money-market funds.
In an interview on Sept. 21, Ashworth said the new information “basically legitimises the approach the Federal Reserve has taken” by making it clear that, so far anyway, there’s little risk of inflation breaking out from too much money.