Does the Fed want to cut interest rates? Analyst: M2 does not support it at all!

Bert Dohmen of Dohmen Capital Research said that the recent sharp increase in broad money supply (M2) means that the Federal Reserve will not be able to deliver on the interest rate cuts expected this year.
Dohmen wrote in a recent note: We have consistently mentioned M2 growth as one of the factors that suggests the Fed is not actually succeeding in fighting inflation.
Data from the St. Louis Fed showed that weekly M2 continued to surge.
This is \’not seasonally adjusted\’ data. Therefore it does not include the usual \’seasonal adjustment\’ factors.
Dohmen said understanding the difference between seasonally adjusted and non-seasonally adjusted Fed data saved and earned a fortune for our members during the runaway inflation period of 1978 to 1980.
In March 1980, after the U.S. bank\’s prime interest rate reached a high of 20%, interest rates dropped sharply.
Dohmen said. Bond bulls are rushing in to buy government bonds. (This behavior) is totally wrong! \”In the summer of 1980, \’seasonally adjusted\’ money supply growth was still significantly below the peak earlier that year,\” he said.
But we noticed that despite the Fed\’s vow to still fight inflation, the \’not seasonally adjusted\’ M2 began to rise rapidly.
Dohmen said this led him to correctly predict that the U.S. prime rate would reach a higher peak by the end of the year.
Sure enough, on December 10, 1980, the prime rate hit a new high of 21.5%.
For the current cycle, Dohmen writes, prime rates may not be that high because economic statistics are so heavily manipulated.
He pointed out: M2 broke through beautifully and surged to a new high above the high before January 1984.
If that were a stock. It would be a \’buy\’ signal.
Dohmen said the Fed is in a dilemma because they are forced to finance a record national debt deficit while continuing to fight stubbornly high inflation.
He believes that the large amount of US Treasury debt issuance that the market has to digest every week to finance the huge deficit will eventually lead to \’indigestion\’, that is, a buyer\’s strike.
He asked: Is it possible that they want to blame the weakness in the bond market, that is, rising interest rates, on inflation? The U.S. Treasury cannot let the market start to worry about insufficient demand for Treasury bonds.
So. It\’s better to blame the weak bond market on inflationary pressures.
To back up his point, Dohmen shared a chart of the long-term monthly performance of the iShares Barclays 2 U.S. Treasury ETF (TLT).
It plummeted 53% in late 2023. It then rebounded. It should now return to the 2023 lows (red horizontal line), he wrote.
TLT trend He concluded: The Federal Reserve was forced to step on the accelerator to support the financing of the U.S. Treasury’s record deficit.
They know it\’s inflationary. But they have no choice.
Therefore, Dohmen said, all the talk about how many times the Fed might cut interest rates this year is pointless.
They know they probably won\’t be able to cut rates at all, and that will only add more momentum to the market, especially stocks in top industries that have been rising recently.
Since the early stage of the epidemic in 2020, when a double top pattern was formed at approximately $171, TLT has been declining steadily.
According to reports, the International Monetary Fund warned in April that the U.S. Treasury Department planned to increase debt issuance while continuing quantitative tightening. This may have contributed to the recent increase in bond market volatility.
Barclays pointed out that the $25 trillion in outstanding U.S. debt currently held by overseas private investors exceeds the amount held by overseas governments.
Barclays analysts said: This will affect the market\’s response to the supply of U.S. Treasury bonds. Not only involves the term premium required to hold Treasury bonds. It also includes the volatility of the interest rate market.