What Is M2?
Let me explain M2 directly: it's the Federal Reserve's estimate of liquid assets in the U.S., covering cash on hand, money in checking accounts, savings accounts, and short-term options like money market funds and certificates of deposit (CDs). This includes the Fed's M1 figure, which used to focus only on currency, checking accounts, and travelers' checks, but savings deposits shifted to M1 in 2020.
Key Takeaways
You need to know that cash, checking deposits, and easily convertible items like CDs count as liquid money in the Fed's M2 measurement. M1 fits inside M2 but sticks to cash, savings, checking accounts, and travelers' checks. Tracking circulating money affects interest rates, inflation, and the overall economy—it's essential for understanding these dynamics.
Measuring Money
Economists and central banks monitor M2 to evaluate economic health. The Fed calculates money supply in different 'M' categories, from narrow to broad. M2 is broader than M1, including highly liquid assets not used daily as cash. Think about it: consumers and businesses rarely tap time deposits for purchases, but they can convert them quickly.
We use M2 for discussions on money supply because modern economies shift funds between accounts. For instance, if a business moves $10,000 from a money market to a checking account, M1 rises since it excludes money markets, but M2 stays the same as it includes both.
M2 plays a key role in predicting inflation, which impacts job markets, spending, investments, currency value, and trade— all tied to interest rates and economic conditions.
M2 and Monetary Policy
The Fed's goals are price stability and full employment, and adjusting M2 helps achieve that. These figures reveal the direction, intensity, and success of Fed policies. Back in January 2000, M2 was $4.7 trillion; by March 2025, it exceeded $22 trillion. The biggest spike happened from February to June 2020 during COVID-19, jumping from $15.3 trillion to $18 trillion, aligning with expansionary policies during downturns.
What Was M3?
M3 was the widest money measure until 2006, building on M2 with institutional funds, large deposits, repurchase agreements, and Euro accounts. The Fed dropped it because M2 already provided sufficient data.
What Happens When the M2 Money Supply Increases?
More available cash leads to more spending, which can drive inflation. The Fed tightens supply when inflation climbs.
What Are Considered 'Small Time Deposits'?
These are deposits over 7 days with values under $100,000 at depository institutions.
The Bottom Line
The Fed tracks liquid assets via M2 to direct policy, releasing data weekly for insights into inflation. This helps economists gauge economic pressures accurately.
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