Hoisington Management’s Quarterly Review and Outlook is now available here and always worth a mull. Central banks have been cutting overnight rates, but the money supply has continued to contract, with the latest reading lower than during the 2008 financial crisis.

After years of zero-rate interest policies ballooned debt levels, the 2022-2023 monetary tightening cycle was the sharpest in decades and continues to move at a lag over the world economy.

In their actions since 2008, the five most impactful central banks–the U.S., China, The Euro Area, and the U.K.,–collectively have increased the risk of severe disinflation and poor economic performance. To wit:

With the September 50-basis point cut in the Federal funds rate, all five central banks have lowered their policy interest rate. However, reducing the policy rate differs from sharply accelerating real detrended M growth and boosting its much more crucial multi-year trend growth. The demand for real M is highly unresponsive to changes in the overnight interest rate, indicating high inelasticity. This causes a significant lag between an initial monetary policy action and a meaningful impact on economic activity and inflation.

The headline and core inflation rates will continue to recede in an environment of more excess capacity combined with the monetary restraint of the past two years, which is still working its way into economic conditions (Chart 4). Accordingly, the Federal Reserve will have the latitude to lower the policy rate further. Moreover, additional cuts will be needed to reverse the multi-year decline in real detrended M growth. At the same time, long-term U.S. Treasury bond yields will follow the downward path in inflation. This pattern has been extensively researched and well-documented. The current evidence of the slow growth of real M globally and its impact on the world economy suggests the pressure for long-term treasury yields to fall is increasing.