The move and vacation is done. My files and computers are unpacked. One difficulty with not having time to read or follow the markets is that it becomes difficult to write. The quarterly newsletter will be out later this week and is a month late but life is back to normal now.
While going through the 4,000 emails and research reports that accumulated in my inbox over my month of inactivity the first topic that caught my attention is the monetary figures published by the St. Louis Fed Reserve relating to the Adjusted Monetary Base and Adjusted Reserves.
For over the past three years the Adjusted Monetary Base had been falling and that constitutes a tightening of monetary policy.
The Fed instituted a policy in 2008 where they began to pay interest on excess reserves from banks. This allowed the Fed to expand the monetary base but not the money supply. It was one of the reasons QE was not inflationary. This is one reason that the Adjusted Monetary Reserves tend to mirror the Adjusted Monetary Base.
One sign the economy is accelerating or entering the later stages of this expansion would be the divergence between the AMB and AMR with the Adjusted Reserves falling faster than the Adjusted Base. This would suggest banks are willing to loan funds and not keep them at the Fed.
When the economy was improving through 2015-2016 the AMB fell from a high of 4,167 billion USD to to a low of 3,418 billion USD. A decline of 18%. Over this period the Adjusted Reserve Base fell from 2,924 billion USD to 1,975 billion USD. A decline of 32%
As the economic outlook became uncertain in late 2016 (election related?) the decline in the Base and Reserves reversed. The Adjusted Monetary Base increased almost $600 billion USD since the beginning of 2017 and remained near the year highs. On a base of $3400 billion USD that is an increase of 17.5%.
The Adjusted Reserves increased about $500 billion USD. This was an increase of 25%. This was a sign the economy was beginning to contract.
However, since March 15, 2017 the Adjusted Monetary Reserves has declined 5% while the Adjusted Monetary Base has declined about 2%. This represents looser monetary policy, even while rates have increased. That should be viewed as a sign of economic activity accelerating.
Should the divergence continue, it will suggest that the US economy is accelerating.