Fed Revives Focus on Money Supply Measurements

The Federal Reserve has revived its focus on money supply measurements in recent months, and some economists believe this shift could aid officials in identifying longer-term inflation trends. The Fed's new leader, Kevin Warsh, recently included a section on M2, which tracks currency, bank deposits, small-sized time deposits, and money market fund shares, in the central bank's Monetary Policy Report.

Warsh has stated that he does not consider himself a monetarist and that money supply is just one piece of information to be considered when making policy decisions. However, he also noted that had more attention been paid to M2 during the COVID-19 pandemic, officials might have done better in spotting the high inflation that emerged.

The return of money supply measurements to Fed thinking may help officials better identify longer-term inflation trends, but it will likely remain a peripheral factor for monetary policy deliberations. Economists and some former central bankers 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.