Money supply ticks positive as inflation sticks above 3 percent

U.S. annual money supply growth in April advanced into positive territory for the first time since November 2022, muting the impact of rising interest rates as inflation remains above 3%.

The Federal Reserve said Tuesday that the overall money supply, known as M2, rose 0.59% year-over-year to $20.8 trillion in April after falling 4.5% a year earlier.

The dramatic quantitative easing program implemented in response to the pandemic (slashing interest rates to zero and increasing the money supply) likely averted a deep recession when the pandemic shut down the economy. Massive stimulus packages from both the Trump and Biden administrations also played a large role in averting this recession.

But the excess money in the system allowed companies to raise prices, sparking a surge in inflation that has yet to be contained despite the Fed’s subsequent quantitative tightening program.

” [money supply] “Excess liquidity and savings are likely still permeating the system, as excess liquidity and savings are likely still permeating the system,” Deutsche Bank researcher Jim Reed wrote in an op-ed on Wednesday.

The money supply began to decline in April 2022, at the same time the Fed began raising interest rates.

But M2 has been rising again since October, despite a rise caused by the Fed providing additional credit to the financial industry following bank failures. As long as the money supply is growing, inflation will hover around 3%.

Analysts predict that while it is still above pre-pandemic trends, it will likely return to normal around the end of the year.

“What happens after that is the big open question,” Reid wrote. “To sustain economic growth at current levels, the money supply will need to start growing rapidly again soon. The main ways this could happen are through Fed easing (interest rates or balance sheet movements), increased bank lending, or fiscal expansion.”