Money Supply Increases to Third Highest Level Ever

In March 2015, the monetary base was $4.064 trillion dollars. The money supply increased by more than $200 billion from the February level. Since the Fed decided to end QE in Ocotber 2014, the money supply has been on some wild swings from month to month. Despite the Fed's end to QE and talk of letting interest rates rise, this was the third level of the monetary base in history. The March 2015 level was 4.0% higher than it was one year ago. So, the month-over-month rate of change grew in March after just one month of contraction in February. The annual rate of change fell to 13.3%, which was the ninth straight month of decelerating growth. This was the slowest rate of annual growth since August 2013.

Historically, changes in the monetary base lead changes in capital equipment spending by about two years. Therefore, the money supply is pointing to strong growth in machine tool consumption in 2015. Based on the trend in money supply, the peak rate of growth in capital equipment spending should occur in late 2015 or early 2016. Then, capital equipment spending likely will contract in 2016 and possibly in 2017. But, this is based on just one leading indicator. 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 adjusted monetary base. 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 in the first half of 2015 or however long the Fed will be able to stand weak GDP growth, a rising dollar, and perhaps a falling stock market.

Also, the U.S. dollar major exchange rate (the USD compared to the other six major currencies of the world) and the U.S. dollar broad exchange rate (the USD compared to all world currencies) appear to be good leading indicators of the U.S. monetary base. The US dollar against the other major currencies of the world is growing at an accelerating rate. Normally, this indicates an expansion of the monetary base. But, the Fed seems to be moving in the opposite direction.

The current trend in the 10-year U.S. Treasury rate and exchange rates are clearly pointing toward accelerating growth in the monetary base. The question is will the Fed raise interest rates and slow the monetary base down further or is it all just talk?