In another sign of the significant amount of liquidity in the global financial system, the European Central Bank (ECB) reported today that its broad money-supply gauge, M3, was up 9.3% at the end of November vs. a year earlier, the most since April 1990.
The rise might increase pressure on the ECB to continue to raise interest rates in 2007. If it does, and if the Federal Reserve lowers interest rates, the dollar could weaken again in 2007. The market is priced for the ECB to raise interest rates by about a half percentage point next year.
The acceleration in the growth of M3 in Europe has been mirrored by an acceleration in money supply in the U.S., where M2 has increased at an 8% pace over the past three months compared to 4.3% in the prior year.
These data and other liquidity indicators, such as commercial paper issuance, bond issuance and M&A activity, reduce the need for the Fed to lower interest rates and support the idea that the Fed could have more mopping up to do if economic growth were to accelerate.
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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