Feds' High Rates Mask Money Supply Surge

The Federal Reserve's policy rates have been high for over two years, leading investors to believe that monetary policy remains restrictive. However, several indicators suggest that the money supply is already growing rapidly again.

The M2 money supply reached a new all-time high of $23.155 trillion in June, up 5.6% year-over-year. This measure includes paper currency, coins, checking accounts, savings accounts, and short-term deposits, which are essential for driving consumption, investment, and financial markets.

The even broader M4 aggregate is growing by 6.5%, indicating that liquidity throughout the entire financial system is accelerating.

This trend is significant because it often precedes stock market growth. The S&P 500 has tracked global liquidity trends remarkably well over the years, suggesting that new stock market records are fueled not only by corporate earnings but also by an increasing amount of money in circulation.