The Shrinking Monetary Base

The Shrinking Monetary Base

The Monetary Base (currency in circulation plus bank reserve balances), continues to shrink, declining to its lowest level in October since January of 2021 (see charts below).

  • The Monetary Base is down approximately 17% from its peak in December 2021, driven by lower bank reserves (down 27% in October from their high in September 2021), as the Fed has tightened monetary policy.
  • We expect the Monetary Base to continue to decline in 2023 as the Fed maintains elevated interest rates and as banks continue to tighten lending standards. The Fed’s QT pace in early 2023 is a bit of an unknown.
  • Given the shrinking Monetary Base combined with mounting job losses and a CPI that remains near 40-year highs, one thing is for sure. That one thing is that consumer demand will dramatically soften in 2023. The consumer can’t pretend and extend in perpetuity, especially as credit tightens further.
  • We expect that the Fed will work to flatten the Monetary Base as unemployment reaches 5%. If the Fed wishes to cause an economic depression, it will tighten monetary policy in order to further shrink the Monetary Base as consumer demand softens – a recipe for economic disaster.
Source: https://fred.stlouisfed.org/graph/?g=WY0j
Source: https://fred.stlouisfed.org/graph/?g=WY0w

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