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A sharp decline in the M2 measure of the US money supply could be good news for policymakers in their efforts to bring high inflation under control, St. Louis Fed President James Bullard said.
“M2 exploded during the pandemic and correctly predicted that we would get inflation and now if you look at the same chart M2 growth has declined dramatically,” he told an audience in St. Louis on Thursday. “That bodes well for disinflation but it’s actually turned negative in recent readings.”
M2, which measures cash in circulation plus dollars in bank and money-market accounts, swelled by more than 40% during the pandemic as the central bank flooded financial markets with emergency liquidity.
It peaked at $21.7 trillion in March 2022 and has since declined to $21.4 trillion in November. If the downward trend continues, it would deliver the first annual decline since records began in the 1950s.
The St. Louis Fed has a long history of championing the study of monetary aggregates for insights into inflation. Bullard called himself a “monetarist at heart,” while acknowledging why the practice has fallen out of favor among central bankers.
“It’s just been hard to correlate at high frequency with inflation numbers. I think that’s been the main issue,” he said. “But inflation is certainly a monetary phenomenon. That’s why it’s called monetary policy.
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