Dec

23

The Monetary Base continues to indicate restrictive monetary policy, whereas MZM indicates an accommodative monetary policy. That is not a conundrum as long as one leads the other, and several posts here have demonstrated that MZM leads the BASE.

Heres our current 2-cents worth: The BASE is presently some 6.5 percent below what we refer to as its target. More on that in a minute. MZM is 3.8 percent above its target. Both of those are big numbers. In fact, the BASE has never been this far below its target since the data started. If the BASE were the only tool we had, we'd be very pessimistic right now about the economy. But since we know that MZM leads the BASE, theres less to be concerned about.

How do we arrive at the target? We simply imagine that the Fed knows what it is doing, and has a target rate in mind. All we do then is fit the most appropriate mathematical line to the data. In our opinion that line is a parabola. We could also take a log of the data and then fit a straight line to the logged data. We will leave that to others for another day.

Heres the BASE , and here is MZM .

There are many other relationships that can be hypothesized. This chart looks at smoothed t-bill rates of change vis-a-vis the BASE.


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