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HomeMarketThe Fed’s Interest-Rate Hikes Seem to Be Working. Here’s How You Can...

The Fed’s Interest-Rate Hikes Seem to Be Working. Here’s How You Can Tell.

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The Federal Reserve faces another big decision this coming week. Markets expect it to hike rates by a quarter of a percentage point, a marked slowdown as inflation cools.

But another metric also suggests that rate hikes are working: the amount of money in the economy, known as M2. The growth of M2—a measure that includes currency in circulation, balances in retail money-market funds, savings deposits, and more—had been slowing over the last two years. In December, the growth rate went negative by 1.3% versus a year earlier, marking the first-ever decline since the Fed started publishing M2 data in 1959. M2’s recent peak in February 2021 was 27%.

Rate increases put pressure on M2. Higher rates mean consumers pay more interest on loans, depleting cash reserves. Plus, higher rates push depositors toward nondeposit investments, which also affects M2. Ultimately, falling money reserves will crimp demand and inflation. While the decline may stir recession fears, it’s a little more complex than that. M2 is still 37% higher than it was prepandemic, despite the deceleration. “Households are still sitting on much of these [pandemic stimulus] deposits,” says NYU Stern economics professor Viral Acharya.

Another factor: the Fed’s quantitative-easing, or bond-buying program, which helped juice the pandemic economy and inflated its balance sheet to nearly $9 trillion. Now the Fed is trimming assets, reducing liquidity, but slowly. The balance sheet remains more than double the $4.1 trillion in February 2020. As Acharya says, the Fed “does not want to convert monetary tightening into an episode of financial instability.”

Write to Karishma Vanjani at

Last Week

Stocks Up, Earnings Down

Stocks rallied to start the week, led by tech.
beat on earnings, but warned about softening demand for cloud services—just as it was hit by outages. (The NYSE also had a chaotic opening, after an employee failed to turn off a backup system.)
missed, but said demand is strong; Intel missed big. Fourth-quarter GDP beat at 2.9% in the face of recession chatter. Stocks rolled on. On the week, the Dow industrials rose 1.8%, to 33,977.16; the S&P 500 was up 2.46%, to 4070.48; and the Nasdaq Composite soared 4.32%, to 11621.71.

Leopards to Ukraine

After sharp debate, Germany agreed to supply Ukraine with modern Leopard 2 battle tanks, and allow other European nations to re-export them. The U.S. agreed to send 31 of its M1 Abrams tanks. In Kyiv, several senior Ukrainian officials resigned, including a deputy of President Zelensky, over corruption allegations.

Suing Google

The Department of Justice and eight states sued
Google, arguing that the company had abused its search monopoly power over digital ads. The suit seeks to unwind acquisitions and divestitures. DOJ had targeted Google’s search business in 2020. That case is nearing a trial.

The Paper Chase

The National Archives broadened its document search, as more classified papers surfaced at homes of President Biden and former Vice President Mike Pence. Separately, federal prosecutors charged former FBI counterintelligence chief Charles McGonigal with violating sanctions policy by secretly working for a Russian oligarch and accepting money from a foreign intelligence agent.

Shootings in California

A shooter killed 11 at a Monterey Park, Calif., dance studio during a Lunar New Year celebration. The suspect, Huu Can Tran, 72, killed himself after he was stopped by police. Hours later, shootings at two locations in Half Moon Bay, south of San Francisco, killed seven more. The suspect there, Chunli Zhao, a worker at an agricultural nursery, was arrested in his car.

Annals of Deal Making

Elliott Management took a multibillion-dollar stake in
joining Starboard Value and Jeff Ubben’s Inclusive Capital, and sought board seats…Elon Musk testified that before tweeting, he thought he had a “done deal” to take Tesla private in 2018 with the Saudi Public Investment Fund, but admitted there was no contract and few details…Microsoft invested $10 billion in OpenAI…
a maker of water pumps, valves, and meters, agreed to buy
Evoqua Water Technologies,
which provides water services, for $7.2 billion…The Wall Street Journal reported that
Juul Labs
was in separate talks with
Philip Morris International,

and Japan Tobacco…Rupert Murdoch dropped plans to reunite
News Corp
and Fox. Barron’s parent Dow Jones is a unit of News Corp.

Write to Robert Teitelman at


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