Money Supply increasing in US Economy

There has been high rate of increase in money supply into the US economy. This supply has been growing at a rate of 6% for past many years but all of a sudden the rate of increase has gone up. In last one week this increase has been substantial. Look at the chart below:

Money supply

This increase in money supply can be a cause of inflation if banks starting lending more and borrowers start borrowing more.

average M2

Now the banks are using more of their reserve rather keep them with Fed as excess reserve. This might be the cause for increase in M2 supply.

required reserves

Kindly look at Money Supply Growth Alert by seeking Alpha. Here is an extract from the post where it explains importance of keeping M2 under control and side effects of not able to do it:

Why is this important? Because the Fed has flooded the banking system with $1.6 trillion of reserves in the past few years, and until recently, the vast majority of those additional reserves were being held by banks as Excess Reserves. Banks were using only a very small portion of their additional reserves to create new deposits, which explained why the broad money supply was growing at only 6%, and leaving the rest on deposit at the Fed as excess reserves. That is now changing, as banks are putting more and more of their reserves to work, and thus expanding the money supply.
Strong growth in the broad money supply doesn’t necessarily signal higher inflation, since the extra growth could be due to stronger money demand. But if the extra growth we are now beginning to see corresponds to an increased willingness on the part of banks to lend and borrowers to borrow, then it easily could lead to higher inflation down the road. I will be paying very close attention to M2 in the weeks to come, and I’ll wager that others will too.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

You may also like...

Grab this FREE Forex Trading eBook
and much more..
We respect your privacy.
%d bloggers like this: