Monetarism – the idea that money supply control could be the basis for monetary policy – hit its high-water mark during the first Reagan administration. Nobel Prize winner Milton Friedman famously said that, under monetarism, monetary policy could be run from the basement of the Federal Reserve building by a clerk. The theory has fallen from grace since. Basically, in a global economy with instantaneous capital flows it became difficult to know exactly what the “money supply” is, let alone measure it.
Has there been a stealth return of the importance of money growth, in this case the Fed’s balance sheet? Consider that up until 2019 there was a major reduction of the size of the monetary base. As a result, Treasury yields fell, the dollar strengthened and the yield curve flattened. Since then, the Fed has been adding money to the funding markets. In other words, did monetary contraction outstrip the effects of interest rate cuts? This will bear watching in 2020 – will the FOMC want to return to its original plan to reduce the size of the base, just more slowly? Or will it sit pat – like with its current Fed funds rate stance? Stay tuned.
This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.
Past performance does not guarantee future results.