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Money Supply: An Overview on Reading it


Release Date: Every Thursday at 4:40 PM EST
(For Money Supply report)

Every Thursday at about 4:30 PM ET, the Board of Governors of the Federal Reserve System releases its most recent figures for M1 and M2, the most important figures that currently track the Money Supply.

M1, generally, tracks the more tactile and liquid kinds of money: Currency in circulation, travelers’ checks, and funds that are available on demand from checking accounts and other similar accounts.

On the other hand, M2 includes M1, along with other slightly less liquid assets, including savings deposits (including money market deposit accounts), time deposits in amounts less than $100,000 (e.g. CDs), and balances in retail money market mutual funds. Most in the industry agree that M2 is the more important number.

Sometimes this number is disseminated as the weekly change in M2, as it was for some on 5/21/2015:

M2

Prior

Prior Revised

Actual

M2 Weekly Change

$27.6 B

$27.4 B

$22.8 B


However, more assiduous students of Money Supply numbers will scrutinize the more exhaustive numbers put out on Thursdays by the Federal Reserve in their “Money Stock Measures-H.6” release.

On page one of this release we see the following table: 

 

Table 1

Money Stock Measures. Billions of dollars.

Date

Seasonally adjusted

Not seasonally adjusted

M1 1

M2 2

M1 1

M2 2

May 2013

2,522.0

10,587.2

2,514.9

10,545.7

June 2013

2,517.9

10,639.9

2,519.6

10,610.0

July 2013

2,545.6

10,700.7

2,538.9

10,644.7

Aug. 2013

2,557.3

10,754.5

2,531.7

10,694.2

Sept. 2013

2,578.8

10,809.4

2,549.0

10,763.9

Oct. 2013

2,620.2

10,920.4

2,614.7

10,897.3

Nov. 2013

2,622.2

10,929.8

2,601.5

10,941.3

Dec. 2013

2,654.5

10,984.9

2,711.7

11,068.1

Jan. 2014

2,683.2

11,037.5

2,694.3

11,061.9

Feb. 2014

2,718.6

11,118.5

2,698.5

11,113.3

Mar. 2014

2,745.0

11,161.3

2,765.5

11,238.3

Apr. 2014

2,771.4

11,217.4

2,801.9

11,291.8

May 2014

2,784.6

11,282.6

2,774.5

11,234.5

June 2014

2,813.0

11,330.7

2,817.0

11,296.0

July 2014

2,839.5

11,405.8

2,834.2

11,351.2

Aug. 2014

2,816.0

11,443.6

2,782.9

11,383.5

Sept. 2014

2,856.9

11,481.4

2,827.3

11,433.8

Oct. 2014

2,862.4

11,521.7

2,855.0

11,498.5

Nov. 2014

2,876.5

11,564.7

2,849.1

11,574.5

Dec. 2014

2,910.3

11,630.4

2,976.6

11,719.8

Jan. 2015

2,927.8

11,706.5

2,936.6

11,727.9

Feb. 2015

2,992.3

11,826.3

2,970.6

11,818.1

Mar. 2015

2,987.7

11,845.7

3,014.6

11,926.0

Apr. 2015

2,994.5

11,895.1

3,026.9

11,975.1


Note how both M1 and M2 usually grow a little larger with every passing month, in part reflecting the Fed’s QE program of open market purchases, some of which usually finds its way to a repository tracked by M1 or M2. 

History and Applications

The Federal Reserve first started publishing Money Supply data in the 1940s. They introduced M1, M2, and M3, all in 1971. M3 contains M1 and M2, as well as large time deposits, Eurodollar deposits, and other sources of institutionalized wealth that are less liquid than M1 and M2, and are generally the assets of wealthier people.

The Fed discontinued the publication of M3 in 2006 putatively because it was too expensive to administer. Today, economists follow a M3 figure in China, the Eurozone, and the U.K., but the term “M3” represents slightly different kinds of holdings in these nations.

According to the Conference Board, throughout the 1960s and 1970s all the way until the mid-1980s, M2 routinely and accurately anticipated turns in the general economy. In part this was because M1 and M2 led spending and inflation in predictable ways.

In part this was because the nominal money growth in the late stages of an economic expansion tends to fall as “banks become increasingly restrained in their ability to create deposits by the availability of reserves,”

There are a number of reasons why figures for the money supply began to lose their accuracy as forecasting tools after the mid-1980s. One reason is that investors began to enjoy a variety of choices as to where to put their money, besides demand accounts.

Many began using banking accounts that were not tracked by M2 or M3. Nor were investments in stocks and bonds tracked by these mechanisms, although many money market funds were. And a substantial amount of money began to be wired overseas, either to family members or as investments.

Nowadays, M2 has lost much of its precision because the banks simply aren’t lending the funds that they have gotten from the Fed by buying securities. These funds just sit in reserves presumably until the bank can find a suitable borrower. (Michael Moebs, Moebs Services, CNBC Interview, March, 2015)

Still today there are many who take these money supply figures seriously as market indicators. Some market participants deem protracted growth in M2 as an indicator for upcoming long term inflation.

Others acknowledge that while growth in M2 does not necessarily foretell upcoming spending growth, it does raise a red flag about the strong possibility of inflation growth in the near future. However, probably the most enthusiastic champion of the serious use of money supply data is the Conference Board, the New York research bureau that publishes the monthly Leading Economic Indicators report, among many others.

This report encompasses ten leading indicators and perhaps surprisingly, M2 is the most powerful of these indicators, representing 30% of the final aggregate LEI figure. By all accounts, the Conference Board has found a proprietary way to use M2 to identify fairly precise, timely turns in the markets and in the economy.

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