Fed Rekindles Focus on Money Supply Metrics Amid Inflation Concerns

The Federal Reserve's recent focus on money supply measures may help officials better identify longer-term inflation trends, but it will likely remain a peripheral factor in monetary policy deliberations.

According to experts, decades of financial sector innovation have eroded the relationship between money supply and inflation. However, Fed watchers say that bringing back money supply measurements could provide valuable insights.

The measure in question is M2, which tracks currency, bank deposits, small-sized time deposits, and money market fund shares. Its annual growth rate hit a record 27% in early 2021, more than a year before the Fed started raising interest rates to battle back inflation that reached 7.2%.

The return of money supply measures may have been triggered by Kevin Warsh's arrival as the Fed's new leader. He recently included a section on M2 in the Fed's Monetary Policy Report, which some see as an attempt to gauge its impact.