Lots of economic reports and data releases get plenty of attention: job numbers, inflation data, retail spending. But some economic releases go all but unnoticed. One of those is the money supply — how much money is circulating in the economy.
The Federal Reserve keeps a tally of the country’s money supply, a measure it calls M2. Thursday afternoon, it announced that the number for November was nearly $21.5 trillion.
Actually, the Fed has a few different gauges of how much money is floating around. The first is called M1.
George Pearkes, a macro strategist with Bespoke Investment Group, said you can think of this as money that’s really easy to spend: “checking accounts and cash held by the private sector, generally speaking.”
Then, there’s M2. Which takes M1 and adds in money that’s not quite as easy to pull out and spend, but not too hard either.
“Savings accounts and other liquid savings vehicles that you wouldn’t use to transact day to day, but can very easily be transferred into accounts that can then be used to transact,” Pearkes said.
There are a couple of reasons that tracking M2 is important, said Ernie Tedeschi, the director of economics at the Budget Lab at Yale University.
“One, it just gives us a sense of the amount of spending potential in the economy at any given time,” he said. And money supply can be a tool to steer the economy.
Tedeschi said back in the 1970s and early 1980s, the Fed controlled the money supply before shifting to target inflation more directly.
But even now, the Federal Reserve can still affect the money supply by buying huge amounts of bonds. “The Fed creates money, it sends that money out into the broader economy and it gets bonds back in return,” he said.
Early in the pandemic, the Fed bought over a trillion dollars worth of bonds, causing the money supply to pick up quite a bit.
Kathy Bostjancic, chief economist at Nationwide, said that money went right into the banking system. “That then could be used for loans … and used for eventually businesses or consumers,” she said.
Bostjancic said that was a factor that helped to push inflation higher too.
To be clear, there were plenty of other factors at play, including low interest rates early in the pandemic.
“At the same time, supply chains were impaired, so that hurt the supply side of the economy, just as you were providing all this money for demand,” she said.
Still, Bostjancic said the amount of money floating around can be an indicator of economic activity and inflation.
