Economics: Is The Federal Reserve Really Hawkish?

(Drivebycuriosity) - There is a lot ado about the allegedly hawkish Federal Reserve. Many claim that the Fed is too restrictive and might risk a new recession. I am aware that the Fed keeps her interest rates ( Fed rate) on a high level and does not signal to cut them any time soon. But is her politics really restrictive?

The Fed doesn`t control the economy directly. The authority exerts an indirect influence by coaxing the banks to give more or less credits, which impacts the general credit volume and the money supply. When the Fed hikes her interest rates (Fed rate) the banks are less inclined to give more credits and vice versa. When the Fed buys bonds from the banks (usually US government bonds) the banks have more Fed money on their accounts, which induces them to expand their credits (Q3). When the Fed purchases less bonds - or resells them - the banks have less money on their Fed accounts and are less inclined to give credits.

 

 (source )

When we want to find out how expansive or restrictive the Fed actually behaves, we need to take a look on the money supply, which works as an intermediate between Federal Reserve and the real economy. The image above this paragraph shows that the money supply M2 was shrinking from April 2022 through November 2023 , obviously signaling a tight Federal Reserve Bank policy. 

But the growth of M2 restarted in December 2023 and re-accelerated in the recent months (image on top of this post  ycharts).

High interest rates or not, according to M2 the Fed is not hawkish at all, rather expansive.