This week's Federal Reserve policy statement raised market expectations of "QE2" asset purchases but, perversely, the Fed has allowed the monetary base – currency in circulation plus banks' reserve balances – to contract recently. The base fell by 2.7% in the week to Wednesday to stand at its lowest level since January and 10.1% below the February peak – see chart.

The decline in the latest week reflected a rise in the Treasury's general account balance at the Fed, which resulted in an equivalent outflow from banks' reserves. The general account balance fluctuates as receipts from taxes and debt sales vary in relation to Treasury outlays but the Fed, in theory, can offset the impact on reserves, for example by offering banks repo loans or increasing securities purchases.

If the Fed wished to boost the monetary base ahead of any QE2 decision, it could ask the Treasury to reduce the $200 billion balance in its "supplementary financing account". An increase in this balance was used to drain cash from banks' reserves this spring, when the Fed was mulling an "exit strategy" – discussed in a post at the time.

The fall in the base may prove temporary but the Fed's failure to offer resistance suggests that the internal debate has yet to be resolved in favour of further easing.

As originally discussed in a post last year and illustrated by the chart, fluctuations in the monetary base have tended to lead stock market movements since the Fed embarked on "QE1" in late 2008.