Interesting post at the FRED Blog. It offers a good definition of money:
if you can use it to buy goods and services and to settle debts, then it’s considered to be money.
I still go by Joe Salerno's definition:
money serves as the final means of payment in all transactions.which of course means money can be used "to settle debts". The FRED Blog definition is good.
The post -- by David Andolfatto and Joel Steinberg -- says the recent rise in M1 is the result of a change in Federal Reserve regulations:
On April 24, 2020, the Federal Reserve Board announced that Regulation D would no longer impose limits on the number of transactions or withdrawals permitted on savings deposit accounts.
Apparently, banks have the option to
continue to report the account as a “savings deposit”
or to suspend enforcement
of the six-transfer limit on a savings deposit, [and] report that account as a “transaction account”
Andolfatto and Steinberg say that the
big increase in M1 is a result of banks opting to call the accounts
"transaction" accounts. In other words, it's not an increase in the
quantity of money. It's a change in the way money is counted. That makes
sense: As they point out, there is no comparable big increase in M2
money (of which M1 is part).
This suggests that the rapid acceleration in M1 since May 2020 is mainly from money moving out of the non-M1 components of M2 into M1, rather than reflecting any acceleration in the demand for transaction balances.
This all makes sense. But it's not like nothing happened. M2 is more liquid than it was before.
According to the post,
it’s not immediately clear what advantage there is from the bank’s perspective in relabeling savings accounts as transactions balances.
But there must be an advantage: "the big increase in M1" is evidence of it.
//
The post links to the April 2020 announcement of the regulation change. The announcement:
The Federal Reserve Board on Friday announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenient transfers from the "savings deposit" definition. The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent.
It's covid-related. That again. I should have known. Their next paragraph:
The regulatory limit in Regulation D was the basis for distinguishing between reservable "transaction accounts" and non-reservable "savings deposits." The Board's recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary.
"The Board's recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary." This is the evolution of finance: one thing leads to another.
The
evolution of finance is always something to be wary of.
The post also links to some "frequently asked questions". One question asks whether the "interim final rule" is temporary or permanent. Permanent:
The underlying reason enabling the changes in Regulation D is the FOMC’s choice of monetary policy framework of an ample reserve regime. In such a regime, reserve requirements are not needed. As a result, the distinction made by the transfer limit between reservable and non-reservable accounts is also not necessary. The Committee’s choice of a monetary policy framework is not a short-term choice. The Board does not have plans to re-impose transfer limits but may make adjustments to the definition of savings accounts...
Evolution at work.
Come to think of it, evolution brought us covid.
In their conclusion, Andolfatto and Steinberg offer this thought:
In any case, it seems that the modification of Regulation D in late April has effectively rendered savings accounts almost indistinguishable from checking accounts from the perspective of depositors and banks.
I guess I'm gonna have to stop thinking in terms of M1, huh.
8 comments:
The Fed says "The interim final rule allows depository institutions immediately to ... allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent."
So, it's because of covid. But the Fed also says "The underlying reason enabling the changes in Regulation D is the FOMC’s choice of monetary policy framework of an ample reserve regime."
So which is it: Covid, or the "choice of monetary policy framework" ?
The "ample reserve regime" goes back to the days of Quantitative Easing, no?
... and the ample reserve regime is "not a short-term choice". It is not temporary. So either they think the pandemic is not temporary, or the change has little to do with covid.
To finish a thought -- the ample reserve regime does not go back to the days of Quantitative Easing.
In a Press Release dated 15 March 2020, under the heading "Reserve Requirements", the Fed notes that "In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime."
They announced the "ample reserve regime" in January 2019, a year before the first hints of covid. "Ample" is NOT something that happened in response to covid. Covid is just the excuse.
2 points
*M2 has grown more than M1 after covid (see graph)
https://fred.stlouisfed.org/graph/?g=zTv1
*In 2007 M1 was about $1.4Tn and daily transfers on FedWire averaged $3.5Tn. So obviously there is a lot more money being spent beyond M1 money unless you believe the entire M1 money supply was changing hands every few hours.
I had not been following the changes in Fed regulation in the last year so thanks for pointing that out.
WARNING! TOO MANY GRAPHS! MY BRAIN IS EXPLODING!
The FRED Blog post says the Fed revised Regulation D on April 24,2020. But their graph shows "rapid acceleration in M1 since May 2020".
To evaluate that acceleration I wanted to "index" M1 and M2 to that date, without distorting "billions". So I subtracted the May 11 2020 value from each series to pin them together at zero on May 11. It gave me a closeup comparison of the two totals. M1 lags a little until mid-November, then suddenly catches up.
https://fred.stlouisfed.org/graph/?g=zTLL
Looking at "change from year ago, billions" M1 and M2 rise together until mid-November, then M1 jumps way up.
https://fred.stlouisfed.org/graph/?g=zTMb
Looking at "change in billions" and subtracting nothing, the graph is jiggy and hard to read. But there is a big inexplicable jump in M1 in late November, while M2 decreases... An inexplicable jump, except that it makes M1 catch up with M2, on the "billions" graph! Maybe the Fed made an end-of-year "adjustment".
https://fred.stlouisfed.org/graph/?g=zTNW
From the FRED Blog post:
"On the other hand, it’s not immediately clear what advantage there is from the bank’s perspective in relabeling savings accounts as transactions balances."
It occurs to me that taking advantage of the regulation change ASAP will probably make it more difficult for the Fed to reverse their decision, should they desire to do so, because it would (I imagine) be increasingly costly for the banks as the volume of funds affected grows in size. The Fed wouldn't want to upset that apple cart, especially if it involves a lot of cost.
Someone pointed out that M1 is money that does not earn interest. Maybe Jim pointed it out, not sure. It wasn't an accident. It was by design of policy long ago, part of a response to the Great Depression. I have to find that information.
Meanwhile, it occurs to me now that M1 money is NO LONGER money that does not earn interest, now that savings accounts have been "relabeled" as transaction accounts.
This is like the last, desperate step in the wrong direction. And the problem, I say again, is that policymakers think like bankers.
At the FRED Blog see:
Savings are now more liquid and part of “M1 money”
and
What’s behind the recent surge in the M1 money supply?
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