U.S. Money Supply Shrinks for 1st Time Since Fed Started Sharing Data

The U.S. money supply contracted for first time since 2005. Federal Reserve The data were first published in January 1960.

According to the most recent Data According to the Federal Reserve System Board of Governors, the M2 money-supply rate declined by 1.3 percentage year-over-year in December 2022. It was 0.01 percent in November 2022. This is also a sharp decline from the February 2021 peak, which was nearly 27 percent.

Total national money supply is at over $21.2 trillion. This figure is 37 percent higher than the $15.458 billion pre-pandemic level.

M2 is a measurement of the U.S. money stock that includes cash, checkable deposits, traveler’s checks, small-denomination time deposits, shares in retail money market mutual funds, and other categories of deposits that can easily be converted to cash.

Ryan McMaken, an economist and senior editor at Mises Institute, recently alluded to the Rothbard–Salerno money supply measure (TMS, or “true money supply”). This metric, an alternative to the Fed’s official M2 gauge, was developed by economists Murray Rothbard and Joseph Salerno to be a more accurate depiction of money supply movements because it includes Treasury deposits at the central bank and excludes retail money funds and short-time deposits.

“The last time the year-over-year (YOY) change in the money supply slipped into negative territory was in November 1994. At that time, negative growth continued for 15 months, finally turning positive again in January 1996,” McMaken Write. “During December 2022, YOY growth in the money supply was at -2.4 percent. That’s down from November’s rate of -0.55 percent and down from December 2021’s rate of 6.44 percent.”

Federal Reserve Chair Jerome Powell, at the Federal Reserve Building in Washington, May 23, 2022. (Olivier Douliery/AFP via Getty Images).

Experts believe that the rate rises since March 2022, regardless of what measurement they use, have been effective.

The Federal Open Market Committee raised interest rates by over 450 basis points in the past year. This lifted the benchmark federal funds rate from 4.50 to 4.75 percent to a range of 4.50 to 4.75. Two key trends are reflected in higher interest rates, which has an impact on the money supply. First, consumers will pay more interest on loans. This can impact cash reserves. A rising rate environment will encourage consumers to invest in non-deposit options such as stocks and mutual funds, annuities, or exchange-traded funds.

Despite the gradual slowdown of the expansion of the money stock over the last year, the financial system remains flooded with liquidity. This indicates that U.S. central banking monetary policymakers still have much work to do to normalize the market.

One of these measures is trimming the Fed’s balance sheetThis includes everything from Treasurys to corporate bonds to mortgage-backed securities. But while this has become an instrumental component of the institution’s quantitative-tightening cycle, policymakers haven’t reduced it to pre-crisis levels.

The central bank injected stimulus and relief funds into the economy during the COVID-19 crisis. The central bank’s bond-buying program, which grew the balance sheet by approximately 117 percent, brought it to a peak of $8.965 trillion in March 2022. It has fallen by almost 6 percent to $8.5 trillion since then. According to market experts, the Fed may be avoiding accelerating the balance sheet reduction out of concern of upsetting financial markets.

Does this confirm a recession?

Many economists believe that a decrease in or contraction of the money supply will usually trigger a recession.

The famous economist Steve Hanke was a Johns Hopkins University professor of applied economics. Telled CNBC reported that the flatlining money supply would cause the U.S. to slip into recession in 2023.

“We will have a recession because we’ve had five months of zero M2 growth, money supply growth, and the Fed isn’t even looking at it,” He stated. “We’re going to have one whopper of a recession in 2023.”

Hanke reiterated his position in an interview with Hanke October 2022. Telling Kitco News that the shrinking money supply will be responsible for worsening economic conditions, noting that the Fed’s tightening has reversed the annualized growth rate at an “unprecedented” pace.

“Where we’re going is determined by where the money supply is going,” He stated. “The last seven months, the money supply has actually contracted by 1.1 percent. That’s almost unprecedented. That means, of course, you have a big change in the money supply and then there’s a transmission mechanism. There are lags between the thrusts in the money supply, whether it’s going up or it’s going down, and what happens to the real economy. Sometime, in 2023, we’ve got a pretty big recession baked in the cake.”

In the first half of 2022, the U.S. economy fell into a technical recession—that is, back-to-back quarters of negative gross domestic product—but the country recovered in the second half, growing by 3.2 percent in the third quarter and 2.9 percent in the fourth quarter.

Many economists and market analysts believe that the baseline scenario is a recession in 2023, 2024.

Many indicators point towards a recession. The Conference Board’s Leading Economic Index (LEI). In the period June-20-2222, the rate of decline was nearly 4 percent. The 2- and 10-year Treasury yields have been inverted for several months, while the Fed’s preferred three-month and 10-year yields have been inverted since late last year. Multiple manufacturing Purchasing Managers’ Index readings, including the S&P Global Manufacturing PMISince late fall,, have been in contraction territory.

Bankrate’s Fourth-Quarter Economic Indicator Poll A majority of economists believe that the United States will experience an economic decline of 64 percent this year.

“If a much-feared recession does emerge as the year unfolds, this would seem to be the most widely predicted contraction of the economy that I can remember,” Mark Hamrick is a senior economic analyst at Bankrate. “It would also be essentially self-inflicted by the Federal Reserve, which has been aggressively raising interest rates in the cause of slaying the inflation monster.”

But following last week’s January jobs reportExperts believe that the Fed can still achieve a soft landing to avoid a recession.

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