Fed Cuts Not Lifting Money Supply

This past summer, I wrote about an indicator that is frequently overlooked but that can actually provide a good read on the U.S. economy: the nation's money supply -- specifically, the narrowest definition of the money supply, M1.

M1 consists of the most liquid forms of money, namely cash in circulation and money in people's -- and companies' -- checking accounts.

When the economy is picking up, M1 tends to rise as businesses write more checks for wages and other expenses; conversely, when the economy is slowing down, M1 falls as businesses write fewer checks.

In the intervening six months, the Federal Reserve has taken a number of steps to pump money into the banking system. It has cut short-term rates three times. It has also intervened in the money markets, in a very pronounced way, via repurchase agreements.

These are arrangements to add reserves to the banking system by purchasing Treasuries and other securities from dealers for a specified period of time. Typically, dealers buy back the securities after one to seven days, but recent repos conducted by the Fed have been for much longer periods.

Normally, when interest rates fall, it becomes easier for consumers and businesses to borrow money -- money that ultimately ends up in people's pockets and in their checking accounts.

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