CFS Divisia M4 (DM4) declined by the 14th largest amount on record since 1968.
The implication is that inflation and growth are slowing more dramatically than many believe.
Over years and cycles, our data and analytics offer paths for investors to profit and officials to conduct policy in a way to limit inflation and promote growth in a less volatile financial environment.
A message on markets, analytics and policy implications will follow next week.
View “Falling Money and the Fed” at
In its 2022 Annual Report to Congress, the Office of Financial Research (“OFR”) warned that threats to U.S. financial stability are elevated compared to previous years because of rising inflation, tight credit conditions and geopolitical uncertainty.
OFR found that U.S. economic growth slowed due to elevated interest rates, a significant increase in commodity prices and lingering supply chain issues from the COVID-19 pandemic. OFR reported that non-financial corporate credit risk is rising, but household credit risk remains low. OFR said that financial stability risk is elevated across the financial system, including (i) macroeconomic risk, (ii) credit risk, (iii) liquidity and funding risk and (iv) contagion risk. OFR also that said (i) high volatility in the digital asset market, (ii) increased frequency and complexity of cybersecurity attacks, and (iii) financial losses due to climate-related financial risk contributed to the increased risk to financial stability.
Additionally, OFR highlighted the launch of two pilot programs:
- the Non-centrally Cleared Bilateral Repo Pilot Project, which OFR said will give regulators more insight into the non-centrally cleared bilateral repo market. OFR is currently considering a rule to establish an ongoing data collection program as to bilateral repo (see previous coverage); and
- the Climate Data and Analytics Hub pilot, which provides regulators with reliable climate data and tools to properly assess climate risks to financial stability.
In the report, OFR tells us, “[a]s a frontier risk, climate-related financial risk—though difficult to model and forecast within the financial system—presents an increasing threat to financial stability. Being able to assess it accurately is vital to mitigating its effects.” Put differently, OFR acknowledges that it cannot measure the risk that climate change poses to financial stability, and it cannot demonstrate that climate change is a financial stability risk, or how risky it is, but OFR pledges to find something there. This makes no sense whatsoever. If the U.S. government is able to demonstrate the risks that arise from climate change in a convincing manner, businesses will adjust to these risks. For now, OFR does not have the data.
Further, much of what OFR paints as “climate change risk” is really very ordinary “weather risk,” such as building houses in areas likely to be flooded, or areas at risk of wildfires. (See footnote 167 of the OFR report and the papers cited therein.) These risks do not arise because the temperature rose a degree; they arise because people are building where perhaps they should not, which undoubtedly creates financial risk. But it is not climate change risk; it’s weather risk. If the OFR would approach the issue of weather more temperately, it would be more likely to produce work of value.
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Today, the Financial Times published Sheila Bair’s Opinion piece “The Fed must emulate the tactics of Volcker’s fight against inflation.” Sheila notes that:
- US Federal Reserve chair Jay Powell has expressed deep admiration for the legendary Paul Volcker, yet Powell is deviating from Volcker’s methods.
- Volcker fought inflation by restraining growth in money supply to keep monetary policy tight through two recessions to finally beat inflation.
- For many years, the Fed has unwisely paid little attention to the huge volume of money its accommodative polices have created. It now needs to follow Volcker’s example and attack excess money supply head-on.
We look forward to any comments you might have.
To view the full article:
Sheila Bair is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow and Advisory Board member at the Center for Financial Stability.
The KU Economist reported on my recent Op Ed in the Kansas City Star.
Barnett Op Ed Outlines Why Fed Was Caught Unawares by Inflation (Summer, 2022)
You can read the Op Ed in the Kansas City Star here.
Professor William A. Barnett – CFS director of Advances in Financial and Monetary Measurement (AMFM) – questions “Why were the Fed’s inflation forecasts so wrong?”
He then addresses limitations in the modeling approach at the Federal Reserve and – more importantly – offers ideas for the future.
To view Bill’s opinion piece…
Thanks to Patrick Harker (President, Federal Reserve Bank of Philadelphia) for thoughtful remarks and engagement with CFS members and friends.
The full video starts at 3 minutes and is now available… https://www.youtube.com/watch?v=99zqumz3Pyg
Congratulations to David J. Lynch at The Washington Post for being the first in a major news outlet, as far as we are aware, to ask the question “why does the Fed ignore the money supply”?
The piece covers much ground, references Bill Barnett’s work as CFS director of Advances in Monetary and Financial Measurement (AMFM), and quotes Steve Hanke, CFS special counsellor and Johns Hopkins professor.
Yet, misconceptions exist. Lynch frames monetarists versus “all but the monetarists” and “conservative critics” versus others. He is correct. Sadly, this is the narrative.
However, CFS Divisia monetary aggregates and liability measures vividly illustrate how Fed policy transmits through the financial system and into the real economy. That’s it. They have been exceedingly helpful at analytically and dispassionately identifying trades and how the economy responds to policy.
CFS monetary data and optimal uses are vehemently non-partisan.
We look forward to any comments you might have.
To view the full article in the Washington Post:
CFS Chairman of the Advisor Board William R. Rhodes was interviewed by Trish Regan of American Consequences. They discussed the dangers of inflation, and the need to tackle it rapidly so it doesn’t turn into a more serious problem of stagflation or hyperinflation as the US experienced in the late 70s and early 80s. Bill also points out that the inflation problem is not unique to the US; it is also a problem for the UK, continental Europe and other countries as well. He states that the time for action on reducing inflation and rising prices is now, before it becomes embedded in the expectation levels of the population.
Listen to the Interview Here.
Commentary by Steven Lofchie
Former Vice Chair for Supervision Randal K. Quarles covered a broad range of topics in his farewell remarks. He celebrated the overall strength of the banking system and suggested areas where there is latitude for regulatory change or recalibration.
“But I did at the time, and still do, have concerns about the possible precedents that have been created by the novel [credit] facilities that we [the Federal Reserve] created [as a reaction to the pandemic].”
Federal Reserve Board Vice Chair for Supervision Randal K. Quarles
Read his remarks, Between the Hither and the Farther Shore: Thoughts on Unfinished Business.
The Center for Financial Stability (CFS) hosted remarks and a discussion with Federal Reserve Board Governor Christopher J. Waller on the economic and monetary outlook on Friday, November 19.
Remarks and the discussion are available at:
Thanks also to Howard Marks, John Ryding, Michelle Caruso-Cabrera, Colin Teichholtz, Nick Sargen, Colby Smith, Nick Silitch, Lisa Lee, Bruce Tuckman, and Jeff Young for excellent questions.