New York, January 26, 2010 (FBC) Last year, the amount of money in the US economy contracted for the first time on record, a development that some economists believe confirms that US inflation is slowing.
The Federal Reserve’s main measure of the nation’s money supply — known as the M2 money supply — slipped for a fifth consecutive month in December, falling by a record $147.4 billion to a seasonally adjusted $21.2 trillion from the previous month, U.S. central bank data showed. He showed this week.
The amount of cash, coins, checking and savings deposits, other short-term deposits, and money held in money market funds is down nearly $300 billion from a year ago and more than $530 billion since the Fed began operations last March. A vigorous and sustained process of removing liquidity from the economy to combat hyperinflation.
It was M2 in March 2020 when the Fed cut rates and began buying bonds to support the economy with $6.3 trillion – a 40% increase – at the start of the coronavirus pandemic. In the year Crisis.
The recent contraction in the money supply comes as the Fed has been raising interest rates sharply to bring inflation back to its 2% target. Since last June, she has slashed holdings of nearly $8.5 trillion in Treasuries and mortgage bonds by $400 billion to increase that rate, pulling the economy out of financial solvency.
Money supply advocates have long argued that the nation’s ever-increasing supply of money is a cakewalk of inflation. It is an argument that has lost credibility with policymakers since the decade before the pandemic when M2 grew more than 80%, but inflation was persistently above the Fed’s 2% target.
This variable has changed in the last two years, however, with money supply trends moving in the same direction as inflation: money supply increases rapidly at the beginning of 2022, inflation; Inflation has also slowed since M2 began its steady decline last summer.
Some federal officials are now taking a new interest.
M2 “correctly predicted that we would explode during the pandemic and get inflation,” Federal Reserve Bank President James Bullard, a proponent of policy tightening, said earlier this month. As seen in the 1960s, 70s, and 80s, “inflation is definitely a monetary phenomenon” and “when you have a big movement in money, you get the movement in inflation.”
Of course, measuring money supply is complicated, there is no one way to do it. The Fed itself changed course, publishing a broader measure in 2006 called the M3.
Bullard, while acknowledging the cooling of the money supply, said that the reduction would “pretty well moderate inflation,” meaning the Fed could face a sustained trend of lower inflation.
According to a paper published this month by the Mercatus Center at George Mason University, economists and policymakers would do well to monitor future money supply measures.
“Money has disappeared from the analysis of monetary policy,” writes Joshua Hendrickson of the University of Mississippi. With the money supply performing better than expected in recent inflation, he said it would be “wrong” to ignore these numbers.
And economists are still taking it as a matter of serious consideration when considering monetary policy and inflation.
“I think what we’re finding is that the relationship between the money supply and inflation is much less linear,” said Thomas Simon, an economist at investment bank Jefferies.
Still, Simmons said, the Fed’s aggressive balance sheet expansion during the pandemic appears to have had a bigger impact on inflation than in recent decades.
Reporting by Michael S. Derby; Editing by Dan Burns and Andrea Ritchie
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