According to data released yesterday by the Federal Reserve, the U.S. monetary base closed at USD 3.8850 trillion for the bi-weekly period ending 2 April 2013, leaving the base USD 134 billion, or 3.6%, higher than year end 2013. Compared to the same period last year, the base increased 30.1%. This is a tremendous increase even byÂ Japanese standards.
With the Fed tapering now starting to bite combined with a higher denominator than last year, the year on year percentage increase was the lowest since the bi-weekly period ending 21 August last year. This means that even if the Fed did not taper, the growth rate in the base would continue to slow. The Fed taper therefore means the growth rate will drop even more. The monthly asset purchases will now be USD 55 billion a month starting this month. Assuming the Fed continues to buy USD 55 billion a month in assets for the rest of the year, this would result in an expansion of the base of “just” under 17% this year. With the Fed’s expectationÂ to reduce asset purchases “by a further $10 billion at each upcoming meeting absent a material change in the economic outlook” (here) the increase in the growth rate would fall below the 17% increase if the plan is stuck with. The growth rate in the base would as a result drop more than half the just under 40% expansion witnessed in 2013.
In one way or another, this drop in the growth rate of the monetary base will have negative consequences for the stock market as interest rates could move higher and money supply will expand less than otherwise. Both are negative for not only equities, but most asset prices. It would be challenging to argue that Fed balance sheet expansion has not been a primary driver of stock market prices especially in 2013. Perhaps stock market investors is just starting to absorb this knowledge as the S&P 500 index dropped 2.65% this week.Â
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