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The M1 Money Multiplier is the ratio of M1* to the St. Louis Adjusted Monetary Base and it has been below 1.0 since June 2009, the end of The Great Recession (at least according to the NBER). The culprit? The massive increase in excess reserves.
What does a M1 Money Multiplier less than 1.o indicate? For every dollar created by the Federal Reserve (an increase in the monetary base M0), a multiplier of less than 1.0 will result in a <1 dollar increase of the money supply (M1).. So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves. And, of course, near zero deposit rates at commercial banks isn’t helping.
While bank credit is expanding once again (red line is YoY growth), it is under the average growth levels post 1995. The reason credit growth is so slow? 1-4 family residential mortgages,historically a large player in bank lending. are only starting to get back into positive territory on debt outstanding.
And it is the large banks that hold the most excess reserves (or deposit them with The Fed).
There is still lingering fear since the financial crisis about commercial bank stability despite the findings of the bank stress tests. Will The Fed overcome their fears?
*M1 is a measure of the U.S. money stock that consists of currency held by the public, travelers checks, demand deposits and other checkable deposits including NOW (negotiable order of withdrawal) and ATS (automatic transfer service) account balances and share draft account balances at credit unions).
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