US M2 Money Supply Grows 5.4% Year over Year in July
M2 liquidity expanded at its fastest pace in three years, complicating the Fed's inflation outlook despite recent rate hikes.
Key points
- US M2 money supply grew 5.4% year over year in July, the fastest pace since mid-2022.
- August inflation hit 3.4% year over year, keeping it above the Fed's 2% target despite recent rate hikes.
- Fed Chair Kevin Warsh identifies M2 as a critical indicator for measuring the total stock of money in circulation.
The US M2 money supply increased by 5.4 percent year over year in July. This marks the fastest expansion rate recorded in three years.
This surge coincides with August inflation running at 3.4 percent. The Federal Reserve recently raised rates for the first time in three years.
Liquidity expansion drives market concerns
M2 includes checking accounts, savings, and small time deposits. More circulating funds typically increase demand and push prices higher.
The Federal Reserve ended quantitative tightening in December last year. It then resumed bond purchases to stabilize overnight funding markets.
Rising stock prices may also contribute to this growth. Investors often move capital gains into standard banking accounts.
Fed officials debate money supply impact
Former Chair Jerome Powell previously stated that M2 lacks direct economic implications. He argued the classic relationship between money and inflation no longer holds.
Current Chair Kevin Warsh cites M2 as a key money stock measure. He suggested the Fed might have predicted pandemic inflation better with this data.
Inflation remains above target level
Core CPI excluding food and energy rose 2.4 percent in August. This remains above the Federal Reserve's two percent target.
The Motley Fool notes this trend requires careful monitoring. The gap between current rates and targets remains significant.
