Money Supply (M1/M2)
The money supply refers to the total stock of money circulating in the U.S. economy, measured at different levels of liquidity — M1 covering the most liquid assets and M2 adding less-liquid savings and time deposits — and tracked by the Federal Reserve.
The Federal Reserve defines and publishes U.S. money supply measures weekly through its H.6 statistical release. The two primary aggregates are M1 and M2. M1 is the narrowest measure and includes physical currency in circulation, demand deposits at commercial banks, and other liquid deposits such as checking accounts and NOW accounts. M2 includes everything in M1 plus savings deposits, small-denomination time deposits (CDs under $100,000), and retail money market mutual fund shares. As of a 2020 redefinition, M2 also absorbed the former M1 savings-deposit distinction, making M2 the most widely followed aggregate.
The size and growth rate of the money supply have long been central to debates about inflation and economic activity. The monetarist school, associated with Milton Friedman, argued that sustained inflation is always and everywhere a monetary phenomenon — that is, inflation results when the money supply grows faster than the economy's productive capacity. This view informed Fed policy through much of the early 1980s, when Chair Paul Volcker used money supply targets to break the inflationary cycle of that era.
Modern central banking focuses primarily on interest rate targeting rather than money supply targets, in part because the relationship between money supply growth and inflation has been unstable — as demonstrated by the massive M2 expansion following the 2008 financial crisis that produced little inflation. However, the extraordinary M2 growth of 2020-2021, when M2 increased by roughly 25% in a single year due to pandemic-era stimulus and Fed asset purchases, contributed significantly to the inflation surge that followed.
M2 year-over-year growth rates are tracked by analysts as a supplemental inflation signal. Rapid M2 growth does not guarantee imminent inflation — velocity must also remain stable or rise — but it does increase inflationary risk over a multi-year horizon. The Fed can influence M2 growth through the federal funds rate, reserve requirements, and the size of its balance sheet.