Part 2/13:
Dr. Hanky starts his analysis by highlighting the flatlining of the money supply over the past couple of years. With the growth rate of broad money—measured by the M2 aggregate—hovering around 4% annually, well below the 6% rate needed to hit the Federal Reserve’s 2% inflation target, he warns of an impending economic slowdown. This stagnation influences inflation, which has already declined from previous highs and is now near 2.3%.
He explains that changes in the money supply, albeit with a lag, significantly impact both inflation and economic growth. Anemic growth in the money supply, coupled with policy uncertainties, points toward a recession in the near future, especially considering the lagged effects of monetary tightening or loosening.