Observing Market Behaviour : Money supply
The money supply is a key number to watch, because growth in money
supply can be a leading indicator of inflation in situations when the money
supply is greater than the supply of goods. When more money than goods is
around, prices are likely to rise. Commodities and money traders will want to
keep close watch over these three aggregates — money supply, inflation, and
goods and services.
The Bank of Canada and the Fed track two monetary aggregates: M1 and
M2. M1 includes money used for payments, such as currency in circulation
plus chequing accounts in banks, trust companies, credit unions, and caisses
populaires. The Canadian monetary aggregates can be tracked at www.
bankofcanada.ca (see Weekly Financial Statistics) and at www.statcan.
gc.ca (see Economic and Financial Data). Currency sitting in bank vaults
and bank deposits at the central banks are not part of M1, but instead are
part of the monetary base. M2 includes M1 money plus retail nontransaction
deposits, which is money sitting in retail savings accounts and money market
accounts. You can follow the American money stock measures for M1 and M2
at www.federalreserve.gov/releases/h6/Current. When you total
the money base, M1 and M2, you can track the total amount of money sitting
in someone’s account or circulating in the economy.
The Bank of Canada attempts to manage money growth through short-term
interest rates, or through the reserves provided to deposit-taking institutions.
When short-term rates change, they affect mortgage and lending
rates at banks and credit unions. When interest rates rise, consumers and
businesses pay off existing loans. The result is slow growth of M1+ and
other monetary aggregates. The BoC monitors several indicators to achieve
its inflation target. The growth of M1+ provides useful information on the
future economy and is a leading indicator of the rate of inflation. The Bank
of Canada’s monetary policy supports a level of spending on goods and services
consistent with keeping inflation within its target range. By monitoring
the supply of money and credit, the BoC ensures that total spending in the
economy is consistent with controlling inflation.
The Fed decided in July 2000 that it no longer would set target ranges for growth
rates of the monetary aggregates. In the late 1970s, money supply drove the
Fed’s decision-making process. As money supply grew to what was considered
out of hand, the Fed kept raising interest rates until they were so high that many
believe the Fed’s moves actually caused the recession in the early 1980s. After
that time, managing interest rates became a higher priority than managing
money aggregates. The Fed didn’t kill the idea of target ranges for the money
supply until it was certain that managing interest rates alone would help stem
inflation. Now that the Fed has proved interest-rate management works, it
decided it no longer needed to set a target for monetary aggregates.
supply can be a leading indicator of inflation in situations when the money
supply is greater than the supply of goods. When more money than goods is
around, prices are likely to rise. Commodities and money traders will want to
keep close watch over these three aggregates — money supply, inflation, and
goods and services.
The Bank of Canada and the Fed track two monetary aggregates: M1 and
M2. M1 includes money used for payments, such as currency in circulation
plus chequing accounts in banks, trust companies, credit unions, and caisses
populaires. The Canadian monetary aggregates can be tracked at www.
bankofcanada.ca (see Weekly Financial Statistics) and at www.statcan.
gc.ca (see Economic and Financial Data). Currency sitting in bank vaults
and bank deposits at the central banks are not part of M1, but instead are
part of the monetary base. M2 includes M1 money plus retail nontransaction
deposits, which is money sitting in retail savings accounts and money market
accounts. You can follow the American money stock measures for M1 and M2
at www.federalreserve.gov/releases/h6/Current. When you total
the money base, M1 and M2, you can track the total amount of money sitting
in someone’s account or circulating in the economy.
The Bank of Canada attempts to manage money growth through short-term
interest rates, or through the reserves provided to deposit-taking institutions.
When short-term rates change, they affect mortgage and lending
rates at banks and credit unions. When interest rates rise, consumers and
businesses pay off existing loans. The result is slow growth of M1+ and
other monetary aggregates. The BoC monitors several indicators to achieve
its inflation target. The growth of M1+ provides useful information on the
future economy and is a leading indicator of the rate of inflation. The Bank
of Canada’s monetary policy supports a level of spending on goods and services
consistent with keeping inflation within its target range. By monitoring
the supply of money and credit, the BoC ensures that total spending in the
economy is consistent with controlling inflation.
The Fed decided in July 2000 that it no longer would set target ranges for growth
rates of the monetary aggregates. In the late 1970s, money supply drove the
Fed’s decision-making process. As money supply grew to what was considered
out of hand, the Fed kept raising interest rates until they were so high that many
believe the Fed’s moves actually caused the recession in the early 1980s. After
that time, managing interest rates became a higher priority than managing
money aggregates. The Fed didn’t kill the idea of target ranges for the money
supply until it was certain that managing interest rates alone would help stem
inflation. Now that the Fed has proved interest-rate management works, it
decided it no longer needed to set a target for monetary aggregates.
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