Monetary Policy & Inflation | US
Marshallian K Turning Negative Conveys No Additional Threat To Markets
- By Dominique Dwor-Frecaut
- 3 min read
Since end-Q1, M2 has flattened (Chart 1). This mainly reflects a marked slowdown in the growth of bank deposits and a decline in retail money market fund (MMF) assets. The zero-rate environment is behind the latter, making it difficult for MMFs to compete with banks that offer convenience and relationship-based services that MMFs lack. By contrast, the growth of currency in circulation has continued apace.
Because the slowdown in M2 has been accompanied by a pick up in GDP growth, M2 velocity, that was in free fall since the pandemic started, has recently stabilized (see chart 2). The inverse of broad money, the Marshallian K, has therefore turned negative yoy, following a spike earlier in the pandemic. This has led some market participants to argue that the Marshallian K turning negative was a bearish signal. In this note I look under the hood of the M2 slowdown and argue that a negative Marshallian K is not a source of concern.
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