Fed Faces Ongoing Battle to Tame Inflation Despite Slower Money Supply Growth
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The Fed has succeeded in slowing the growth of the money supply after the massive expansion during COVID, which is necessary to reduce inflation.
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However, money velocity is still rebounding as the economy recovers, so even modest money supply growth could lead to higher inflation.
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Mortgage rates significantly reduced home sales and mortgage origination last year, which helped slow money supply growth.
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As rates decline, the housing market is recovering, so mortgage origination may rise again, making it hard for the Fed to shrink the money supply further.
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If money supply grows even moderately and velocity rebounds, the Fed will struggle to hit its inflation target for some time.