M2 Soars to Record Levels

M2 increased $32.2 billion in the week ended March 24, according to data released late yesterday by the Federal Reserve. M2 has advanced $264 billion to $7.721 trillion since inflecting upward in the middle of January, a 21% annual rate.

These figures are unprecedented. The only periods close to the current period (they are not close at all, really) are September 2001 and in the fall of 1998, when the Fed cut rates following Russia's default and the Long Term Capital Management collapse.

The Fed does not change rates by fiat; the Fed does not announce a change in rates, causing the rate to become what is announced. To bring the funds rate down, the Fed must do something: inject reserves into the banking system. By increasing the supply of money, the price of money decreases, and that is how the Fed achieves a lower funds rate.

It is therefore not surprising that the money supply has surged. This is helping to boost bank credit, which is the total amount of monies extended by the nation's commercial banks via loans, leases and securities purchases. It is a $9.5 trillion figure that is up at a 14% pace since last July and which typically grows at a rate of about 9% per year.

If the Fed's aggressive actions continue to lead to strong growth in the money supply, financial assets will grow by more than $1 trillion over the next year, giving banks new capacity to lend, helping to absorb the many assets they have been forced to put on their balance sheets recently.

ALL TONY CRESCENZI BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

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 revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and 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.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.