What It Measures
M2 includes:
- Currency (physical cash in circulation)
- Checking deposits (demand deposits)
- Savings deposits (including money market deposit accounts)
- Small time deposits (CDs under $100,000)
- Retail money market funds
M2 is the most commonly referenced money supply measure because it captures money that is readily available for spending.
Why It Matters
Inflation Link: Milton Friedman's monetarist theory holds that "inflation is always and everywhere a monetary phenomenon."Liquidity Measure: Shows the amount of money available in the economy.Fed Policy Impact: Reflects the cumulative effect of Fed policy actions.Velocity: M2 velocity (GDP/M2) shows how actively money circulates.
How to Interpret
Growth Rate: Focus on year-over-year percentage change rather than absolute level.Historical Comparison: M2 grew exceptionally fast during COVID stimulus (>25% YoY) and contracted in 2022-2023.Velocity Context: High money supply with low velocity may not be inflationary.
Historical Context
M2 grew by over 25% in 2020-2021, the fastest pace since WWII, due to massive fiscal stimulus and Fed asset purchases. It subsequently contracted for the first time since the 1930s in 2022-2023.