M2 represents the U.S. Federal Reserve’s estimate of the total money supply, encompassing all the cash individuals hold, along with money deposited in checking accounts, savings accounts, and other short-term saving vehicles like certificates of deposit (CDs). It does not include retirement account balances and time deposits above $100,000.
The Federal Reserve also tracks M1, which includes currency in people’s pockets or their checking and savings accounts. Money kept in time deposits and money market funds does not fall under M1. This ’near money’ is not instantly convertible to cash nor used as a medium of exchange but remains relevant for broader measures.
Key Takeaways
- M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible assets like CDs.
- M1 represents an estimate of cash, checking, and savings deposits only.
- Weekly changes in M2 and M1 are monitored as indicators of the money supply. Rapid growth can signal inflationary pressures.
- M3 encompasses M1 and M2 along with large institutional cash deposits and is published quarterly.
- Gold is not part of M1, M2, or M3; it’s no longer used as a common currency in the modern economy.
Understanding M2
Measuring the money supply of an economy is a complex task due to the intricate nature of ‘money’ and the economy’s size and details. Typically categorized as ‘M’s, these measures range from narrow to broad monetary aggregates. M2 represents a broader measure than M1 due to its inclusion of highly liquid assets not routinely used as cash but can be converted quickly.
M3 includes numbers on large-time deposits, institutional money market funds, and other significant liquid assets, being published quarterly.
M1 and M2 Reporting Times
The Federal Reserve releases M1 and M2 figures every Thursday at 4:30 p.m. The St. Louis Fed tracks these numbers. Economists often use M2 as a broader measure because modern economies feature transfers between different account types frequently.
For instance, a business might transfer $10,000 from a money market account to a checking account. This move would boost M1 without affecting M2, as M2 includes both types of accounts.
M2 Uses
M2 is essential for forecasting inflation. Inflation and current interest rates significantly impact the economy, affecting job availability, consumer expenditure, business investment, currency strength, and trade balances.
Changes in Money Supply
The Federal Reserve’s dual mandate focuses on price stability and maximum sustainable employment. Manipulating the M2 money supply is a tool used to achieve price stability.
The M2 numbers provide critical insights into central bank policy direction and effectiveness. M2 has shown consistent growth, from $4.7 trillion on Jan. 3, 2000, to $20.8 trillion on March 2, 2024. The most notable rise occurred from February to June 2020 during the COVID-19 pandemic when M2 surged from $15.3 trillion to $18 trillion.
Current Value of M2
As of March 2024, M2 stands at $20.8 trillion, representing the total cash Americans have in their wallets, checking, and short-term savings accounts.
Impact of Increasing M2 Money Supply
More cash in the economy means more spending, which can be beneficial to some extent. However, excessive amounts can usher inflation, prompting the Federal Reserve to constrict the money supply to curb inflationary trends.
Is M2 a Leading Economic Indicator?
M2 is widely regarded as an inflation predictor, potentially classifying it as a leading economic indicator. Some economists consider M3 an even better indicator of inflation, as it includes large institutional liquid assets.
The Bottom Line
The Federal Reserve closely tracks the overall cash flow within the economy, focusing on the growth or reduction trends over time. Excessive cash on hand can indicate emerging inflationary pressures, stressing the importance of monitoring M2 closely.
Related Terms: M1, M3, liquidity, monetary policy, time deposits.
References
- Board of Governors of the Federal Reserve System. “Money Stock Measures - H.6 Release”.
- Board of Governors of the Federal Reserve System. “What is the Money Supply? Is it Important?”
- Federal Reserve Bank of St. Louis. “M2”.
- Board of Governors of the Federal Reserve System. “Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective”.
- Federal Reserve Bank of St. Louis. “M2 (WM2NS)”.
