Money supply decreased for first time in U. S.
2023.01.26 07:55
Money supply decreased for first time in U. S.
By Kristina Sobol
Budrigannews.com – For the first time ever, there was a decrease in the amount of money flowing through the economy of the United States last year. This, according to some economists, supports the argument that inflation pressures in the United States are continuing to ease.
According to data released this week by the United States central bank, the main measure of the nation’s money stock that is used by the Federal Reserve—the M2 money supply—slid for a fifth consecutive month in December, falling by a record $147.4 billion to a seasonally adjusted $21.2 trillion from the previous month.
Since the Federal Reserve began its aggressive — and ongoing — process to drain liquidity from the economy in order to combat high inflation in March, the volume of cash, coins, checking and savings deposits, other small time deposits, and cash parked in money market funds has decreased by more than $530 billion compared to the same time last year. This decrease was nearly $300 billion.
M2 skyrocketed in March 2020 as the Federal Reserve cut interest rates and began purchasing trillions of dollars’ worth of bonds to support the economy during the coronavirus pandemic. In the end, M2 increased by $6.3 trillion, or 40 percent, from its level prior to the crisis.
The Fed has been aggressively raising rates in an effort to bring inflation back to its target of 2%, which is why the money supply has been falling recently. It has also reduced its holdings of Treasury and mortgage bonds by $400 billion, to approximately $8.5 trillion, since June, further depleting the economy of financial liquidity.
Money supply purists have argued for a long time that the nation’s ever-increasing money supply was a “powder keg” for inflation. In the record-length economic expansion that preceded the pandemic, when M2 rose by more than 80%, this argument lost credibility with policymakers because inflation never sustained above the Fed’s 2% target and spent much of that decade significantly below it.
However, over the past two years, this dynamic has changed, with trends in the money supply moving roughly in the same direction as inflation pressures: Inflation increased in tandem with the rapid expansion of the money supply into the early years of 2022; Inflationary pressures have also decreased since M2 began its long-term decline in the summer.
There are now some Fed officials showing renewed interest.
According to Federal Reserve Bank of St. Louis President James Bullard, an early proponent of policy tightening, M2 “exploded during the pandemic, and correctly predicted that we would get inflation” earlier this month. “When you get a huge movement in money, then you do get the movement in inflation,” as was observed in the 1960s, 1970s, and 1980s, “inflation is certainly a monetary phenomenon.”
Certainly, there is no one method for measuring the money supply, which makes it difficult. The Federal Reserve’s own strategy has changed, and in 2006, it stopped publishing an even more expansive measure known as M3.
Despite the fact that the money supply has decreased, Bullard stated that this “bodes well for disinflation,” indicating that the Fed will likely face a long-term trend of lower prices.
According to a paper that was published this month by the Mercatus Center at George Mason University, policymakers and economists would do well to monitor future measures of the money supply.
Joshua Hendrickson of the University of Mississippi wrote, “Money has all but disappeared from monetary policy analysis” given the economics profession’s emphasis on the view that monetary policy works by managing expectations about the future path of interest rates. He stated that ignoring these numbers has been “misguided” given the money supply’s better-than-expected track record on recent inflation issues.
In the meantime, economists are still considering whether they should pay more attention to the money supply when considering monetary policy and inflation.
Thomas Simons, an economist at investment bank Jefferies, stated:
“I think that what we are finding is that the relationship between changes in the money supply and inflation is far less linear” than had been previously understood.
However, according to Simons, it appears that the Fed’s aggressive balance sheet expansion during the pandemic had a greater impact on inflation than in previous decades.
