Surging U.S. Monetary Inflation: The Money Supply Growth Rate Hits Four Year High

The U.S. money supply growth rate surges to 11.4% for the week ending 10 October according to figures released last night by the Federal Reserve. This was the highest y/y growth rate reported for almost four years (since December 2012). 

The spike especially in recent weeks is driven by a more than sixfold y/y increase in the Treasury's deposits with the Federal Reserve. Currently this account balance stands at $392 billion, an account that prior to the QE programs used to carry only a negligible amount. From what I know, the surge in the account balance is related to the Fed paying back to the Treasury most of the interest earned on its current balance of some $4.2 trillion in treasury-, federal agency-, and mortgage-backed securities. If we assume an average interest rate earned on these assets of 3%, the Fed will receive some $127 billion a year in interest, most of which will be paid back to the Treasury at regular intervals. 

If we exclude the Treasury's deposits from the money supply measure (as the official aggregates such as M1 and M2 do) the current y/y money supply growth rate comes in at a more modest, but still substantial, 8.5% (the upper end of the range during the last three years). However, as the Treasury tends not to sit on cash for too long, it is highly probably this measure of the money supply growth rate will soon pick up substantially as well. 

Though the Fed no longer officially targets the money supply, FOMC members are nonetheless most certainly following money supply developments closely as they probably have not forgotten that monetary inflation is the key driver of price inflation. The recent surge in the money supply could therefore exert at least some pressure in the direction of a rate hike. These monetary developments could also exert some upward pressure on the inflation component of bond yields.

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Update 22 October 2016: please read the comments from Anonymous below regarding TBAC.