One of the most common misconceptions is that inflation risk is rising due to the growth in money supply. This misunderstanding is largely driven by the headlines of the Federal Reserve buying $85 billion of securities each month, in addition to other central banks' actions.
In normal times this level of aggressive purchases would indeed spur the money supply, but we are not in normal times. Let's review a few things:
September 2012
Federal Reserve announces it will purchase $40 billion of US Treasuries per month. At the time, growth in M2 was falling quickly, from close to 10% in June to under 6% in September. Excess reserves were falling almost 10% annually. The slowing of the velocity of M2 was beginning to moderate, declining less than 3% annually after falling around 5% during the previous twelve months.
December 2012
Federal Reserve announce it will purchase $45 billion of mortgage backed securities per month, in addition to the purchases of treasuries. M2 growth had bounced upward in October and November was appeared headed back down. Excess reserves were still declining but lower single digits annually. The velocity of money continues to decline, but at a more consistent low single digit average.
Present Day
Excess reserves are growing over 10% annually.
