Will the negative growth of US M2 for the first time in history affect the Fed's decision-making?

　　According to data released by the United States during the Spring Festival holiday, the broad money supply (M2) in the United States will experience negative growth for the first time in history in December 2022.

The year-on-year growth rate of US M2 in the month was -1.3%, the lowest level since the Federal Reserve began tracking this indicator in 1959, and the first decline in US M2 in all available data.

The year-on-year growth rate in November has fallen to 0.01%, well below the peak of 27% in February 2021.

　　During the COVID-19 pandemic, the US M2 scale soared from US$16.1 trillion in March 2020 to US$21.9 trillion in March 2022, an increase of more than 36%; since the Fed started raising interest rates in March 2022, the US M2 scale has declined continued to decline, and the tightening of liquidity gradually caused obvious constraints on the economic activities of the United States.

　　Bai Xue, an analyst at Dongfang Jincheng Research and Development Department, told Shell Finance and Economics that the year-on-year growth rate of M2 in the United States has continued to slow down sharply since March 2021. Therefore, the decline in the growth rate and scale of M2 in the United States is also the cumulative result of the combined effect of the Fed’s aggressive interest rate hikes, balance sheet shrinkage, and the continued consumption of residents’ excess savings after the fiscal stimulus fades.

　　In terms of scale, the current US M2 is as high as US$21 trillion, which is still about 40% higher than the level of about US$15 trillion before the epidemic.

If we further consider that the statistical caliber of M2 in the United States (compared with my country) is small, and does not even include time deposits of more than 100,000 US dollars, this means that the currency liquidity in the United States is still at a relatively high level and contributes to the decline in inflation. And the indication of economic recession is relatively limited.

　　Bai Xue believes that considering that as of December last year, the year-on-year growth rate of CPI in the United States has slowed down for six consecutive months, and the fall of M2, an important indicator for measuring money supply, will help to continue to curb inflation, thereby further clarifying the direction of US inflation this year. down direction.

Therefore, the decline of M2 in the United States is beneficial to inflation, but the effect will not be too great. It is expected that the Fed will continue to raise interest rates about 3 times in the first half of this year, totaling 75 basis points (bp).

　　Wang Youxin, a senior researcher at the Bank of China Research Institute, told Shell Finance and Economics that the decline in the year-on-year growth rate of M2 in the United States reflects the impact of the Fed’s rapid interest rate hikes on the money supply.

After the epidemic, the Federal Reserve adopted an unprecedented loose policy to support enterprises and the household sector, resulting in a substantial increase in liquidity supply, a rise in the savings rate of the household sector, and an upward trend in M2 growth. However, after rapid interest rate hikes and the start of balance sheet shrinkage, the money supply gradually decreased. Combined with the impact of high inflation and price fluctuations in the capital market, the excess savings of residents has decreased, and the savings rate has continued to decline, driving down the growth rate of M2.

　　The decline in the growth rate of M2 in the United States reflects the gradual cooling of its economy. As inflation is a monetary phenomenon, the reduction in money supply means that the growth rate of demand will slow down. The financing costs of enterprises and residents will increase, and the availability of funds will decrease. Inflation is expected to continue to fall .

　　In this context, since the impact of the tightening monetary policy on the money supply has begun to fully manifest, inflation indicators such as the personal consumption expenditures price index (PCE) and the consumer price index (CPI) have continued to decline, residents’ inflation expectations have eased, and the U.S. economy The downward pressure is gradually increasing, and the purchasing managers' index (PMI) of household consumption, U.S. manufacturing and service industries is weak. It is expected that the Federal Reserve will gradually slow down the pace of interest rate hikes to avoid excessive impact on the economy and promote the economy to achieve a soft landing.

Whether the U.S. economy will have a soft landing, the European and Japanese central banks will become the main focus of the market

　　During the Spring Festival holiday, the United States announced the GDP data for the fourth quarter of 2022. The annualized GDP growth rate in the fourth quarter of last year was 2.9%, and the year-on-year growth rate was 0.96%. %.

In addition, data from the U.S. Department of Commerce on Friday showed that U.S. PCE rose 5% year-on-year in December 2022, and core PCE excluding food and energy prices rose 4.4% year-on-year, still far above the Fed’s 2% target. Slowest growth rate since late 2021.

　　Dai Qing, Chief Analyst of Overseas Strategies at Guotai Junan, said in the research report that the U.S. GDP in the fourth quarter of last year exceeded expectations by 2.9%, raising hopes of a soft landing for the economy. Landing is becoming a major focus of the market.

　　Dai Qing believes that there is no suspense for the Fed to raise interest rates by 25 basis points (bp) in February, and the focus of the next stage is when to stop raising interest rates.

At present, the attitude of Fed officials has eased, and a consensus has been reached on the rate hike rate in February; however, there are differences on the end point of the rate hike. The focus of the market in the next stage will be whether there will be further discussions at the February meeting and a signal to suspend rate hikes.

　　In addition, the market has already fully expected a 25bp rate hike in February, but the current market is still relatively optimistic about the end point of the rate hike, and continues to be out of touch with the Fed.

The latest US GDP data reflect that the economy is still resilient, and the current job market is still tight.

It is expected that Fed officials will remain "hawks" to guide market expectations back to raising interest rates by 25bp in February and March, and reaching the peak of interest rates in May and suspending interest rate hikes, maintaining high interest rates until the end of the year.

　　Li Chao’s team at Zheshang Securities Macro also believes that the United States will still face recession pressure in the future, and the trends of various forward-looking indicators have also been confirmed. officially over.

　　Li Chao's team also pointed out that from overseas during the Spring Festival, the core of global liquidity variables in the future will still focus on the European and Japanese central banks, and the Fed's tightening will gradually come to an end.

In Europe, members of the European Central Bank have intensively voiced their voices to promote tightening. It has almost become a consensus to raise interest rates by 50bp in February and March respectively. European debt risk is still the financial stability risk that needs the most attention in the first quarter.

　　In Japan, during the Spring Festival, the Bank of Japan released the minutes of the interest rate meeting in December last year and the summary of views in January, both pointing to the low probability of policy adjustment during Kuroda’s tenure; on February 10, it is expected to nominate a new governor candidate, yield curve control (YCC) Policies may be further adjusted after the change of governor.