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Reuters: Economists Eye Surging Money Supply as Inflation Fears Mount

June 17, 2021

Article by Karen Brettell in Reuters

Some economists are warning that surging money supply may exacerbate a rise in U.S. inflation, which is already accelerating at its fastest rate in more than a decade.

Money supply - which measures outstanding currency and liquid assets - rose 12% year-over-year in April, according to The Center for Financial Stability's Divisia M4 index including Treasuries.

The measure has been running between 22% and 31% each month since April 2020, fueled by unprecedented economic stimulus from the Federal Reserve and U.S. government. That compares with annual growth of around 3-7% that was common from 2015 to early 2020.

“This money supply growth is just so much faster than anything we’ve seen,”said Desmond Lachman, resident fellow at the American Enterprise Institute. "It’s a reflection of a huge amount of pent-up demand in the economy... it’s difficult for me to see how you don’t get inflation.”

Indeed, the central bank’s bond purchases after the financial crisis failed to spark the inflation some expected, with the economy taking years to recover and money supply falling at that time.

This time around, however, banks are struggling with record deposits after the U.S. government ramped up fiscal spending, while the Federal Reserve is buying unprecedented amounts of bonds.

Some economists worry that such a confluence of factors could cause demand to grow at a faster rate than economic output, pushing prices higher.

Money supply growth was a factor behind high inflation in the 1970s, as the government ran up fiscal deficits and the Fed adopted loose monetary policies in an effort to boost employment.

The Fed could be reluctant to raise rates as the Treasury grapples with record debt levels, even if inflation rises, said William A. Barnett, director at the Center for Financial Stability.

But if rates on primary market loans increase without a corresponding rise in the rate paid on reserves it could lead to an “explosion of lending,” Barnett said. "The risk to the economy is future inflation."

Barnett believes many of the Fed's bond purchases will be permanent, effectively ......

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