The Federal Reserve's reintroduction of money supply statistics into its reporting has revived a long-running debate inside and outside central banking: can monetary aggregates such as M2 provide meaningful insight into inflation trends, or are they relics of an earlier era whose usefulness has been eroded by financial innovation?
Officials and market observers say the return of M2 to the Fed's public documents could improve officials' ability to detect longer-term inflationary tendencies. But most expect the measure to remain a secondary input in the policy process rather than a driver of decisions.
M2, the monetary aggregate in focus, includes currency in circulation, bank deposits, small-denomination time deposits and retail money market fund shares. The aggregate was explicitly mentioned in the Federal Reserve's latest Monetary Policy Report - a formal reference the central bank had not made in about a decade. The inclusion came after the arrival of the Fed's new leader, Kevin Warsh, who acknowledged the insertion was deliberate.
Warsh described the brief M2 section as "an Easter egg that we hid in there to see if anyone reads these monetary policy reports," and he emphasized he does not present himself as a monetarist. "I do not show up here as a monetarist. I do not show up and say the secret to inflation is, if we only knew M2, everything would be swell," he said in a Senate hearing. Instead, Warsh argued that "my view is that a modern central banker should have a mosaic of information" and that "money matters."
Warsh has suggested that had more consideration been given to money growth during the policy response to the COVID-19 pandemic, officials might have been better placed to anticipate the high inflation that later emerged. Year-over-year M2 growth reached a record 27% in early 2021, more than a year prior to the Fed's decision to begin raising interest rates in an effort to curb inflation that climbed to 7.2% by the central bank's preferred measure.
Following a period of brief contraction as the Fed tightened policy, M2's year-on-year growth has returned to a four-year high. In May, M2's annual growth stood at 5.6%, still about 1.2 percentage points below its long-run average since 1960. At the same time, the Fed's preferred inflation gauge registered 4.1% in its latest May reading, more than double the Fed's 2% objective.
Arguments for watching M2
Several economists and former central bankers say that adding M2 back into the analytical toolkit could help spot sustained inflation risks, particularly after an extended period of above-target inflation. They point to the dramatic money growth during the pandemic as a factor that signaled enduring price pressures while many contemporaneous assessments treated rising prices as transitory.
James Bullard, dean of the Mitch Daniels School of Business at Purdue University and former head of the St. Louis Fed, noted the value of such a reminder. "I do think it’s good to remind everybody that monetary policy is ultimately about money," he said, adding a caveat about variability: "We understand that money growth might move around" and caution is warranted, "but if (money supply measures) got really serious in one direction or another, maybe that’s something you should pay attention to."
Market analysts have also signaled they will consider monetary aggregates alongside other metrics. In a recent report, economists at Deutsche Bank observed: "Although the velocity of money can be highly unstable, we find that excess money supply has been positively correlated with inflation over recent decades, particularly during periods of fast excess money growth." They nonetheless warned against granting monetary aggregates too dominant a role in policy formulation, a stance that aligns with Warsh's view that money is one element in a broader informational mosaic.
Shifts in views among policymakers
The renewed focus on money supply appears to have nudged views among some policymakers and former officials. Stephen Miran, a former Fed governor who left the board to create a vacancy filled by Warsh, co-authored a paper for Hudson Bay Capital noting that "most monetary aggregates do not suggest recent high inflation will prove persistent, and it may be inappropriate to attribute recent quarters’ high inflation to excessive money growth." Nevertheless, Miran added a conditional warning: "If money growth begins to accelerate from current levels, it would suggest tighter monetary policy is appropriate."
The latter sentence marks a notable tonal shift for Miran, who had been regarded as a strong dove during his time at the Fed and who, according to the record, argued for aggressive interest rate cuts despite inflation running above target, dissenting in favor of easier policy at each of the six policy meetings he attended.
Skepticism and limits
Not all observers welcome the return of M2 to the central bank's public reporting. Analysts at Wrightson ICAP said they "groaned a little" when they saw M2 included in the report and argued it had been excluded "for good reason" because "traditional monetary aggregates have not been a reliable predictor of inflation trends, or much else, for decades."
Others emphasize broader forces beyond the money supply that contributed to the post-pandemic surge in prices. William English, a former senior Federal Reserve staffer now at the Yale School of Management, cautioned that recent attempts to pin post-pandemic inflation on expanded money stocks often downplay the role of fiscal policy actions, such as direct payments to households during the health crisis, suggesting those fiscal measures were central to the surge in price pressures rather than monetary creation alone.
Additional complexity arises from how much of the central bank's balance sheet expansion translated into money circulating in the economy. Bill Nelson, chief economist at the Bank Policy Institute and a former Fed staffer, warned against assuming a direct connection between the Fed's bond holdings and money supply. "Not only is there no reliable relationship between money and economic activity, there is no reliable relationship between money and the Federal Reserve’s balance sheet," Nelson wrote earlier this month. He pointed out that a large share of pandemic-era money creation remained as reserves on the Fed's balance sheet and never became part of the money supply.
Where money supply fits in policy judgments
Across the debate, a common theme is that M2 will be observed as one signal among many. Proponents argue it can provide early warning of persistent inflation when it moves decisively. Skeptics caution about variability, the influence of fiscal policy, and the peculiarities of modern financial plumbing that break old linkages between monetary aggregates and prices.
For policymakers deciding on interest rates and balance sheet normalization, this means M2 will likely inform but not drive decisions. As Warsh put it, controller of the new emphasis, a modern central banker should assemble a "mosaic of information" and acknowledge that "money matters," while stopping short of elevating any single indicator to a definitive role.
How much attention the Fed ultimately accords to M2 remains to be seen. For now, the aggregate's reappearance in official Fed materials has reignited discussion about the lessons of the pandemic-era policy response, the appropriate balance between monetary and fiscal responsibility in addressing economic shocks, and the set of indicators that help central bankers navigate inflation risks going forward.