US inflation roller coaster prompts fresh look at long-ignored money supply
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Federal Reserve's primary indicator declined for fifth consecutive month in December, data shows
WASHINGTON (Reuters) - For the first time in history, less money was moving across the US economy last year, which some economists feel strengthens the argument that inflation pressures in the country are continuing to decline.
Data from the US central bank released this week indicated that the Federal Reserve s primary indicator of the country s money stock, known as M2, declined for a fifth consecutive month in December, falling by a record $147.4 billion to a seasonally adjusted $21.2 trillion from the month before.
Since last March, when the Fed began its aggressive and ongoing process of draining liquidity from the economy to battle excessive inflation, the volume of cash, coins, checking and savings accounts, other short time deposits, and cash parked in money market funds has decreased by more than $530 billion.
As the coronavirus epidemic began in March 2020, the Fed reduced interest rates and began buying trillions of dollars worth of bonds to boost the economy. As a result, M2 exploded, ballooning by $6.3 trillion, or 40%, from its level just before the crisis began.
While the Fed has been actively raising rates to bring inflation back to its objective of 2%, the money supply has recently been declining. To aid in that process and further deplete the economy of financial liquidity, it has also reduced its holdings of Treasury and mortgage bonds by $400 billion to around $8.5 trillion since last June.
Purists of the money supply have long claimed that the nation s constantly expanding money quantity constituted a fire hazard for inflation. The record-long economic expansion that preceded the pandemic saw M2 rise by more than 80%, yet inflation never sustained a rise over the Fed s 2% objective and spent the majority of that decade noticeably below it. As a result, this argument lost credibility with policymakers throughout that period.
M2 "exploded during the epidemic, and accurately projected that we would get inflation," said James Bullard, president of the Federal Reserve Bank of St. Louis and a pioneer of tighter monetary policy, earlier this month. As was the case in the 1960s, 1970s, and 1980s, "inflation is definitely a monetary phenomena" and "when you get a tremendous movement in money, then you do get the movement in inflation."
There is no one technique to measure the money supply, which makes it a challenging task. The Fed itself has changed its strategy, abandoning the 2006 publication of M3, an even more comprehensive indicator.
