Fed Revisits Money Supply as Inflation Fights Continue

The US Federal Reserve (Fed) has revisited an old indicator in its fight against inflation: money supply. According to Kevin Warsh, the Fed's new Chair, measures of money supply have been reintroduced into the central bank's analysis after being largely absent for nearly a decade.

The measure in question is M2, a broad gauge of the money supply that includes cash in circulation, bank deposits, small-denomination time deposits and money market mutual fund holdings. Warsh stressed that he is not a monetarist who views M2 as the sole indicator of inflation, but rather one of several factors to be considered.

The post-pandemic surge in inflation might have been identified earlier if the Fed had paid closer attention to money supply growth at the time, Warsh believes. Annual M2 growth reached a record 27% in early 2021, more than a year before the Fed began raising interest rates to curb inflation.