Quarterly Review and Outlook


Disaster is a strong but appropriate word that applies perfectly to the state of U.S. monetary policy. Consider the following:

A) The Fed, in reaction to the COVID-19 crisis, dropped the Fed funds rate to 0.25 bps and expanded total reserves of the depository institutions by an average of 63% in 2020 and 2021. This unprecedented growth was achieved by increasing total U.S. Treasury and other securities held outright by $4.5 trillion, equaling 70% of the $6.4 trillion increase in total Treasury securities outstanding. Consequently, the commercial bank deposit component of M2 (that accounts for about 78% of the M2) surged by a record 20.5% over the past two years. This fact reveals the massive coordination of monetary and fiscal policy as government checks were directly funded by monetary largesse. In the face of an unsurpassed breakdown in product delivery systems, this money creation caused a massive imbalance between the demand and supply of goods.

B) The result of the coordinated monetary and fiscal actions was a 5.7% increase in real GDP last year, the best rise since 1984 and a 10.1% rise in nominal GDP, the highest since 1984. With the aggregate demand curve shifting outward and the aggregate supply curve shifting inward, the headline CPI inflation rate jumped from 2.3% in the twelve months ending in December 2019 to 8.5% in the twelve months ending March 2022, the fastest such increase in forty years. Reversing the past monetary and fiscal excess liquidity error will take time and persistence by the Fed.

Harm of Favoring Employment Over Inflation

Most Americans have suffered a substantial fall in their standard of living over the past twelve months. In the latest available twelve-month change, 116.2 million American wage and salary workers suffered a 3.7% decline in their inflation adjusted paychecks, the largest drop since 1980 (Chart 1). This alone more than offsets the gain in income going to the 6.5 million newly employed in latest twelve months. In addition, salary workers suffered a larger loss in standard of living than hourly employees (Chart 2).