Fed Rekindles Money Supply Focus Amid Inflation Concerns

The Federal Reserve has recently started paying attention to money supply measurements again, specifically M2, which tracks currency, bank deposits, and other forms of money in circulation. This shift comes after decades of financial sector innovation eroded the relationship between money supply and inflation.

Fed officials, led by Kevin Warsh, have emphasized that while money supply is not a primary concern for monetary policy decisions, it can be a useful tool for spotting longer-term inflation trends. Warsh has stated that a modern central banker should have a 'mosaic of information' and that money matters.

Economists agree that turning an eye toward M2 might help with longer-run inflation trend spotting at a time when the Fed has been wrestling with five years of inflation above its 2% target. James Bullard, dean of the Mitch Daniels School of Business at Purdue University and former leader of the St. Louis Fed, said 'we understand that money growth might move around' but if M2 gets really serious in one direction or another, 'maybe that's something you should pay attention to.'

However, not everyone is convinced of the importance of money supply measures for monetary policy. Analysts at Wrightson ICAP and William English, a former top Federal Reserve staffer now at Yale School of Management, have expressed skepticism, arguing that traditional monetary aggregates have not been reliable predictors of inflation trends.