Fed Still a Long Way Off Raising Interest Rates

Concerns about rampant inflation in the near future remain a prominent topic among economists and analysts, due to the unprecedented money creation activities of the Fed in recent months.

Bloomberg: For evidence that the Federal Reserve is still a long way off raising interest rates, look no further than the U.S. money supply, Westpac Banking Corp. said.

Of the $2.1 trillion that the Fed is injecting into the financial system, more than half, or 51 cents per dollar, is being posted back at the central bank by financial institutions in the form of excess reserves, a record high, according to Robert Rennie, head of currency research at Westpac in Sydney. That’s likely to ensure that the Fed’s Open Market Committee, which start[ed] a two-day rate-setting meeting today, won’t be concerned about inflation, he said.

“In order for inflation to begin to build you have to have too much money chasing too few assets,” Rennie said…in an interview. “But what the money supply is telling us is that there’s simply not enough within the system to generate inflationary pressures yet.”

“An important part of money is how it multiplies and this is where we see no signs of green shoots at all,” a team led by Rennie wrote in a report earlier today. “We see the arguments behind current market pricing for the Fed as very thin indeed.”

emphasis added

Chart shows the amazing spike in the money supply started during FY 2008.

Graph: St. Louis Fed

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