Economics: Is The Monetary Policy Expansive Again?

 

(Drivebycuriosity) - There is a lot talk about the current monetary policy. Many claim that the Federal Reserve is too restrictive and may risk a recession. These claims are based on the interest rates, which are still on the highest level since 2006.

 

But there is one important indicator that gives a different message: The money supply M2, which is bank notes & coins & liquid deposits at banks (  ycharts  fred.stlouisfed).

 

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The sharp growth of M2 in the years 2020 & 2021, created by Government checks and financed by the Federal Reserve, caused the inflation of the recent years (I elaborated this here ). Too much money chased too few goods. 

In April 2022 the growth of the money supply ended and turned negative, thanks to the end of the government checks and the sharp interest rate hikes of the Federal Reserve. The monetary policy became restrictive, which explains that the inflation rate dropped from 9.l% to around 3%. 

But since November 2023 the money supply is growing again - in spite of the continuous high Fed rates (images above). It seems that the economy is more robust than many believe. It looks like that the resilient economy and growing investments into technology (including AI) lead to growing bank loans that lands on the banking accounts of the customers, feeding the renewed growth of M2.