While the Fed did leave its policy rate unchanged when it concluded its two-day meeting this past week, that hasn't stopped the central bank from quietly removing cash from the financial system.
One measure of money is the system is known as "money w/zero maturity" or MZM, is now contracting for the first time since 1995. MZM represents currency in circulation as well as deposits that could be withdrawn at anytime, such as checking accounts, savings accounts, and money market funds. After growing over the past decade and by over 4% during the first quarter of 2009, MZM started contracting in March at the rate of 2% per year.
It is possible the Fed has ended quantitative easing and is in the beginning stages of tightening monetary policy while leaving interest rates at zero. We could be entering a period where the Fed has decided that days of easy money are over. This, just as the global economy seems to be slowing down from the growth experienced in the second half of last year and first few months of 2010.
The global markets are becoming more volatile as traders react to the stealth tightening of credit by the Fed and possible impact on the the global economy. In addition, with less money to borrow at cheap rates, hedge funds have been caught flatfooted as borrowing costs may begin to increase; which would cause them to raise more cash by selling investments, since they won't be able to borrow at zero percent in the future.
Over the next few months, we will know whether this is just a blip in the monthly data or if quantitative tightening has begun.
