April 11, 2023

The Relationships presented here suggest that : An increase in Reverse Repos lead/cause the short-term interest rates. Increases in the Monetary Base leads M2 which in turn leads to the inflation rate. The recent reduction in M2 growth points to a continued decline in the inflation rate. The manipulation of the composition of the Balance Sheet affects the banking system credit creation resulting in an increase in the money multiplier and long-term interest rates. Keep tabs on the money multiplier. The Fed Balance Sheet reduction has led to a rise in short term interest rates and a relative decline in long-term interest rates. The question that remains unanswered is what happens as the Fed normalizes its balance sheet and eliminates the Reverse Repos? Lower inflation, lower short term interest rates, an increased money multiplier and an upward sloping yield curve?

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