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The year-over-year growth in M2 money supply is a “small step in the right direction,” Deutsche Bank Research analyst Jim Reid wrote in a Chart of the Day note.
Yesterday's release of US money supply data for April showed that the M2 money supply was $20.87 trillion, up 0.12% from March and up 0.59% from 2023.
“It was an important milestone as it marked the first time since November 2022 that the M2 money supply was positive year-over-year,” Reid said.
This money supply includes financial assets held by households, including savings deposits, time deposits, and retail money market mutual funds. It also includes liquid assets such as currency, traveler's checks, and demand deposits.
“Once the Fed ended QE (quantitative easing) and started raising rates, the money supply contracted, which helped lower inflation again,” Reid said. “In fact, it is still 3.9% below its peak levels. But by this measure, the money supply bottomed out in October and has been on a steady but low upward trend ever since.”
That is, an increase of 1.7% in the annualized rate in the last six months.
The money supply is still above pre-pandemic trends. Its “flow” has been negative for many quarters, but “the increase in stock was so enormous that excess liquidity and savings are likely still permeating the system,” he added.
Reid also said that at current growth levels, the M2 money supply should return to pre-pandemic levels by the end of the year. But what follows is “a big open question.”
To maintain economic growth at current levels, he said, the money supply would need to grow faster again soon, and this could happen through looser Federal Reserve policy, banks lending more money or looser fiscal policy. expansive.