Monetary Base Grows at Slowest Rate in 10 Months

In April 2014, the monetary base was $3.929 trillion dollars. That is 25.3% more than it was in April 2013. This is the fifth straight month that the month-over-month rate of change has declined, and this is the slowest rate of month-over-month growth since July 2013. Also, this is the first time since September 2012 that the monetary base was lower than it was the previous month. This is  unusual because the monetary base typically grows at a similar rate to the Federal Reserve's bond purchases. The annual rate of change, now 31.6%, increased to its fastest rate of growth since July 2010. If the Fed continues with its taper, then the annual rate of growth should peak in June 2014.

Historically, changes in the monetary base lead changes in capital equipment spending by almost two years. However, the extreme changes in monetary policy by the Federal Reserve are making it difficult to match up the correlation between the monetary base and machine tool sales the past several years. The correlation of cycles seems to differ somewhat depending on whether you are using machine tool unit sales or real dollar sales of machine tools. You can see how the monetary base leads various machine tool sales and consumption data as well as primary plastics processing equipment at our monetary page.

The real 10-year treasury rate is a good leading indicator for the adjsuted monetary base. Historically, changes in the real 10-year treasury rate have led changes in the monetary based by about 15 months. This is because banks increase their lending due to lower rates that leads to increased deposits that then lead to a need for increased reserves. (Yes, this is the opposite of what many of us think happens - that banks increase their deposits and then lend those deposits.) From early 2012 to the middle of 2013, the 10-year treasury was increasing at a rapid rate. I think this will correspond to a significantly slower rate of growth in the monetary base from June 2014 until some time in the first half of 2015 (or, how long will the Fed be able to stand a shrinking economy in terms of GDP and perhaps a falling stock market).