Dr. Ed’s
Economic
Indicators

M2 – MONEY SUPPLY

Release Date: Weekly, every Thursday
Release Coverage: M1 and M2 as Month-End
Released By: Federal Reserve
Official Release (weekly): http://www.federalreserve.gov/releases/h6/

The M2 aggregate is the measure of money in the economy available for spending. This includes the dollar value of all physical cash and coin, savings accounts, and time deposits. Different numerical aggregates show different subsets of money based on their liquidity, starting with M0 (the most liquid), which is the dollar value of physical cash and coin. M1 includes all of M0 as well as checking accounts, traveler's checks and demand deposits. The M2 aggregate includes the dollar value of all of M1 in addition to savings accounts, time deposits of less than $100,000 (such as certificates of deposit), and money market funds held by investors.

The M2 aggregate is a large component of the Conference Board's U.S. Leading Index (which contains 10 indicators), making up more than 30% of the index.

WHAT DR. ED SAYS:

The Federal Reserve has a measure of control over the money supply aggregates, which differentiates this indicator from most others. Through open market operations such as buying and selling Treasuries and setting the reserve requirements, the Fed does things to alter the money supply through its daily course of business.

The M2 figure is looked at more closely than any other. Cash equivalents in this designation are deemed to be collectively liquid enough to be spent without any real delays or penalty costs. While growth in the money supply does not directly indicate future spending growth as it once did, it does indicate that inflation could be around the corner. If money supply growth is greater than economic growth, there will soon be more money chasing after the same amount of goods. Changes in the M2 are shown as a month end number, which helps to smooth out trends that can occur week to week.

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