What Is M2?
M2 is the U.S. Federal Reserve's estimate of the total money supply, including all the cash people have on hand, plus all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). Retirement account balances and time deposits above $100,000 are omitted from M2.
The Federal Reserve tracks a separate money supply number, M1, that includes currency in people's pockets or their checking accounts and savings accounts. The money deposited in time deposits and money market funds is not counted in M1. For the Fed's purposes, this is "near money." That is, the funds cannot be used as a medium of exchange and are not instantly convertible to cash.
Key Takeaways
- M2 is a measure of the money supply that includes cash, checking deposits, and other deposits readily convertible to cash, such as CDs.
- M1 is an estimate of cash, checking, and savings account deposits only.
- The weekly M2 and M1 numbers are closely monitored as indicators of the overall money supply. Too-fast growth in the numbers can be a warning sign of inflation.
- Another money supply number, M3, includes all of the above plus large institutional cash deposits. The M3 is published quarterly.
- Gold is not counted in M1, M2, or M3. In the modern world, gold is no longer used as a common currency.
Understanding M2
Measuring the money supply of an economy is a challenging proposition. Due to the complexity of the concept of "money" and the size and level of detail of an economy, there are multiple ways of measuring a money supply.
These measures are typically classified as "M" s and fall along a spectrum from narrow to broad monetary aggregates. Typically, the "M" s range from M0 to M3, with M2 representing a fairly broad measure.
M2 is a more comprehensive calculation than M1 because it includes assets that are highly liquid but are not intended to be routinely used as cash. Consumers and businesses don't usually use time deposits when making purchases or paying bills, but in a pinch, they could convert them to cash in short order.
13 includes numbers on large-time deposits, institutional money market funds,and other large liquid assets. This is published on a quarterly basis.
M1 and M2 Reporting Times
The Federal Reserve releases M1 and M2 numbers every Thursday at 4:30 p.m. The St. Louis Fed tracks the numbers.
Economists usually use the broader M2 number when discussing the money supply because modern economies often involve transfers between different account types.
For example, a business may periodically transfer $10,000 from a money market account to a checking account. This transfer would increase M1, which doesn’t include money market funds, while keeping M2 stable since it contains both accounts.
M2 Uses
M2 is a critical factor in forecasting inflation. Inflation and current interest rates have major ramifications for the general economy, as they heavily influence job availability, consumer spending, business investment, currency strength, and trade balances.
Changes in Money Supply
The Federal Reserve's dual mandate is price stability and maximum sustainable employment. One of the ways it works to maintain price stability is by manipulating the M2 money supply.
The M2 numbers provide important insight into the direction, extremity, and efficacy of central bank policy.
M2 has consistently been growing. It was $4.7 trillion on Jan. 3, 2000, and was $20.8 trillion on March 2, 2024. The most extreme growth occurred from Feb. 2020 to June 2020 during the Coronavirus pandemic when M2 jumped from $15.3 trillion to $18 trillion. Other large increases have also coincided with economic weakness, during which expansionary monetary policy was deployed by the central bank.
What Is the Value of M2 Now?
The M2 was $20.8 trillion in March 2024. That's how much cash Americans had in their wallets, checking accounts, and short-term savings accounts.
What Happens When the M2 Money Supply Increases?
When there is more cash out there, more cash is spent. A little more can be good. A lot more can increase the risk of inflation. That's why the Federal Reserve constricts the money supply when the inflation rate rises—it is trying to slow down spending to control the inflation rate.
Is M2 a Leading Economic Indicator?
M2 is seen as a reliable predictor of inflation, so it might be counted among the leading economic indicators. M3 is considered by some economists to be an even better predictor of inflation. This is published quarterly rather than monthly and includes data on large liquid assets held by financial institutions.
The Bottom Line
The Federal Reserve isn't keeping track of how much cash you've got in your wallet, but it has a pretty good idea of how much cash we (as a population) have at any given time. The important point isn't the number but how the number is increasing or decreasing from month to month. Too much cash is seen as a warning sign of a growing threat of inflation.
FAQs
M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.
What does M2 money supply indicate? ›
Key Takeaways. M2 is a measure of the money supply that includes cash, checking deposits, and other deposits readily convertible to cash, such as CDs. M1 is an estimate of cash, checking, and savings account deposits only.
What is the difference between M1 and M2 and M3 money supply? ›
M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks.
What is M1, M2, M3, M4 money? ›
M1, M2, M3, and M4 were the four monetary aggregates used by the RBI between 1977 and 1998 to calculate the money supply. The idea of reserve money was also used by the central bank. However, in 1998, the measurement criteria were changed. The designations are now M0, M1, M2, and M3.
Why does the Federal Reserve use two definitions of the money supply M1 and M2? ›
Thus, the Federal Reserve uses M1 and M2 for money supply as M1 is narrow and focuses on liquidity, and M2 is broader in terms of the money supply.
Does M2 money supply cause inflation? ›
“Recent inflation behavior has been consistent with a lagged effect of M2 on personal consumption expenditures (PCE) inflation,” Neely wrote. For instance, he cited the rise of PCE inflation beginning in February 2021, which coincided with the peak M2 growth rate of 26.9% and was a year after M2 growth began to soar.
What does M2 mean? ›
M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.
Are credit cards M1 or M2? ›
Answer and Explanation: Credit cards are not included in either M1 or M2.
Are savings deposits M1 or M2? ›
M1 is the money supply that is composed of currency, demand deposits, other liquid deposits—which includes savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash.
Are bank reserves M1 or M2? ›
The smallest and most liquid measure, M0, is strictly currency in circulation plus commercial bank reserve balances at Federal Reserve Banks; M0 is often referred to as the "monetary base." M1 is defined as the sum of currency in circulation, demand deposits at commercial banks, and other liquid deposits; it is often ...
Deflation is the decline in the price level of goods and services associated with a contraction in the supply of money and credit. The money supply is influenced by central banks. When the supply of money falls, without a corresponding decrease in economic output, the prices of all goods tend to fall.
What backs the money supply in the United States? ›
Government backs the money supply.
In the United States, the money supply is backed up by the government, which guarantees to keep the value of the money supply relatively stable.
What is the most liquid money? ›
Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances.
Why are credit cards not considered money? ›
Short Answer. A credit card isn't considered money because it does not serve as a store of value or a unit of account. Even though it can facilitate trade as a medium of exchange, it essentially does so by extending credit (a promise of future payment), and not by representing actual stored value.
Are stocks M1 or M2? ›
This option is correct because the common stock is neither included in M1 nor M2. M1 is known as narrow money or transaction money that includes coins and currency whereas M2 is known as broad money that includes money market mutual funds.
What is the relationship between M1 and M2 money? ›
The Relationship between M1 and M2 Money. M1 and M2 money are the two mostly commonly used definitions of money. M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks + saving deposits. M2 = M1 + money market funds + certificates of deposit + other time deposits.
What happens when the money supply increases? ›
An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production.
Which statements describe M2 money supply? ›
The M1 money supply includes currency and money in checking accounts (demand deposits), plus traveler's checks, which are declining in use. The M2 money supply is broader and includes all of M1, in addition to savings deposits, money market funds, and time deposits like certificates of deposit.
