Policy

Fed may get monetary policy mussel back in 2015.

2014 showed no excitement in monetary trends, generally speaking. Besides the Federal Reserve’s Quantitative Easing program (QE), the pockets where the American money is remained mostly stable. The interesting changes were in the first pocket which comprises currency that circulates on the streets (Households). This pocket grew in one year 9.6% (from November 2013 to November 2014), which is a remarkable figure as long as changes in such pocket -arguably- reflect either Inflation or increase in nominal income. Considering that inflation rate in the United Sates has been oscillating roughly around 1.5% for the last two years, this 9.6% may mean that changes in the currency pocket were due largely to an increase in nominal income. Basically, this pocket consists of money that circulates outside the U.S. Treasury, the Federal Reserve’s Banks, and the Vaults of Depository Institutions.

Monetary trends
Changes in the circulating currency may give the Federal Reserve the chance to have the monetary policy mussel back. With data showing low inflation levels for the last two years in the United States, it is almost virtually impossible for the Fed to influence changes in interest rates. Thus, by having 9.6% year change in currency due possibly to an increase in nominal income, chances may increase for a larger number on expected inflation for 2015. Larger expected inflation number may encourage lending during 2015 thereby stimulating consumption and investments, which at the end of the day translate into economic growth.
Another pocket currently experiencing decent growth is the one that contains Demands Posits at domestic commercial banks and US branches of foreign banks. From November 2013 to November 2014 the pocket increased its amount by 147 billion dollars. Such amount represents almost 15% change in just one year. Roughly speaking, US branches of foreign banks hold on average 14% of the total money contained in the Demand Deposits pocket.
Finally, there is the richest pocket –the Vaults of commercial Banks- in the United States: all other money that is out of street circulation, which includes thrift institutions, savings deposits, retail money funds and small denomination time deposits. On the Graph this pocket is tagged as “Total non-M1 M2”. This pocket enlarged its amount by 394.70 billion from November 2013 to November 2014, which represents a percentage change of 4.7% for the same period.
Note: All used data in this article were seasonally adjusted.
Data source: Federal Reserve Statistical Release. December 18th 2014.

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