Every so often, I like to look at the adjusted monetary base.  It is really the one thing that the Fed most directly controls.  It is a reflection of monetary inflation, but not necessarily a reflection of money in circulation.

You can view the latest chart here.

The monetary base has been up and down a bit, but basically hanging around the 4 trillion dollar level.  There are always going to be little ups and downs because of maturing debt that needs to be rolled over.

The monetary base is consistent with Fed policy right now.  The Fed ended QE3, or whatever you want to call it, back at the end of October 2014.  It now has a policy of stable money, at least for now.

Meanwhile, excess reserves held by depository institutions have also seemed to level off.  The chart for excess reserves over the last 7 years has basically mimicked that of the monetary base.  They have gone up and leveled off in tandem.

This is why the monetary base is not an accurate reflection of the money in circulation.  Much of the new money created by the Fed over the last 7 years has not been lent out by banks.  It is sitting there “earning” 0.25% interest with the Fed.

This has helped keep a lid on price inflation.  If all of this new money had been lent by banks to the legal limit, then we likely would have seen an explosion in price inflation.

This is also a big reason on why the federal funds rate has meant little over the last several years.  Banks do not need to borrow overnight money if they are already above the mandated reserve requirements.

The federal funds rate also doesn’t matter much because it is not dictating Fed policy.  The Fed is now telling us directly in the FOMC statements if is expanding the monetary base.  Over the last 5 months, it has been the Fed’s policy to keep a level monetary base by just rolling over maturing debt.

I am a believer in the Austrian Business Cycle Theory.  When there is an artificial boom and the central bank does not continue to provide loose money, then it will eventually expose the malinvestments and lead to something of a bust.  So if the Fed keeps its current policy, then I do expect a recession to hit at some point.  I think a lower stock market will probably lead the way.

The most interesting aspect will be when we actually do hit the next bump in the road.  Will the Fed keep a tight money policy or will it go back to another round of QE?  My bet is on the latter.