The Federal Reserve’s narrowest gauge of money supply (measured in real or inflation-adjusted terms) posted a fractional gain in August vs. the year-earlier level – the first positive year-over-year reading since February 2016. The return of annual growth for the monetary base suggests that the central bank may be laying the groundwork to slow or even reverse its recent efforts to tighten policy.

Recall that real M0’s annual trend offered an early sign in 2015 that the Fed was moving toward hiking interest rates for the first time in nearly a decade. Later that year, in December, the central bank announced that it was raising the target range for the federal funds rate. The central bank has increased rates several times since then.

In the nearly two years since that first hike, real M0’s annual trend has been mostly negative, with a downside bias that reached a trough in Oct. 2016 via a 13.4% year-over-year decline — a 68-year low. Over the subsequent months, the annual decline’s depth has been easing, ticking above zero in August for the first time in 19 months. Is that a sign that the Fed’s recent program of tightening monetary policy is downshifting or perhaps in the early stages of reversing? It’s too soon to know for sure, but M0 data deserves close attention in the months ahead.

Meantime, what might convince the Fed to rethink its recent bias for tightening policy? Relatively muted inflation is probably a factor. In fact, the latest numbers through August show that the core measure of the personal consumption expenditures index – the Fed’s preferred inflation gauge – continued to decelerate. The annual change in core-PCE eased to 1.3% through August, the softest pace since Nov. 2015. The sliding trend serves as a reminder that the Fed’s 2% inflation target has become increasingly elusive this year.

Market expectations for inflation, however, have turned modestly higher lately. For example, the implied inflation rate via the 10-year nominal Treasury yield less its inflation-indexed counterpart ticked up to 1.85% yesterday (Oct. 14), close to a five-month high.

Note, too, that the crowd’s currently expecting the Fed to raise interest rates at the Dec. 13 FOMC policy meeting, based on this morning’s fed funds futures data via CME. (No change is expected for next month’s FOMC meeting.)

The bottom line: the market is effectively dismissing the M0 money supply data.

The deciding factor, one way or the other, will be the incoming data, of course. Although last month’s employment growth posted a sharp slowdown, the sluggish pace is probably due to the temporary effects from hurricanes.

Strong sentiment readings in Sep. for the ISM’s manufacturing and services benchmarks suggest employment growth will bounce back in the months ahead. If so, the latest uptick in the M0 trend to positive terrain may be noise.

Inflation, however, is the joker in the deck. As long as pricing pressure is sluggish, the case for expecting another rate hike is dubious. Accordingly, next week’s Sep. report on consumer inflation promises to be one of the more influential bits of economic data to watch this month.

Keep in mind that at least one Fed official thinks that the recent rate hikes are a key factor for the recent deceleration in inflation. “The FOMC’s policy to remove monetary accommodation over the past few years is likely an important factor driving inflation expectations lower,” advised Minneapolis Fed President Neel Kashkari recently. “My preference would be not to raise rates again until we actually hit 2 percent core PCE inflation on a 12-month basis, unless we have seen a large drop in the headline unemployment rate signaling that we have used up remaining labor market slack, or a surprise increase in inflation expectations.”