The Federal Reserve has slowed the rate of tightening. Where once tightening would end about now, with the reduced rate it ends around the time of the U.S. presidential election. You can draw your own conclusions whether slowed tightening is good or bad for whoever is seeking the top job, but the outcome is less grind for longer.

There are so many ways, visible and invisible, to tighten or loosen monetary policy; the best way to see it is in the reverse repro system, where the access money in the banking system sloshes around. When banks are in receipt of more money than they can use or put somewhere super safe, they turn to the reverse repo to deposit it with the Fed for a return. It’s an indicator of inflationary pressures caused by too much money and when it is empty, as it generally is in historic times, then money supply is at least balanced enough for the banks to be prepared to put all the money they have to work. Banks have been terrified into being rightfully cowardly with money so rather than stuff the money into the pockets of the latest wide-boy like the bad old days, they plonk it into the Feds coffers.

The Fed’s balance sheet continues to be screwed down. Here is the official chart:

Maybe in four to five years it will be back to pre-Covid levels but at some point the lowering process is going to stop.

The fact that the reverse repro decline has slowed suggests inflation is going to stay a bit higher than expected and the excuse will be stagflation. The reason excess money is not falling so fast is because the opportunities to use the money is falling hence supporting the excess. To me the straight line nature of these curves do not look random.

The Fed is keeping the economy juiced and so it should. While people might moan about inflation, no one wants to be crucified on the cross of hard money. Meanwhile the direction of travel is solidly in the right direction.

In the end, the U.S. has a big deficit problem, and short of a miracle the only solution will be inflation. However, that moment is far, far away. So far away most of us will be dead when it happens. Meanwhile nothing is going to break in the coming short and medium term, so we may as well enjoy gold going up and a strong stock market.

Interest rates will be falling soon enough but there is more to money supply and inflation than interest rates.

So within the horizon of this year it’s gold and precious metals up, stocks up and crypto up.

It could be a lot worse.

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