Macroeconomics

6 min readUpdated Apr 12, 2026

M2 Money Supply

ByConvex Research Desk·Edited byBen Bleierⓘ·Updated Apr 12, 2026

M2broad moneymoney stockmoney supply

A broad measure of the money supply that includes all cash and checking deposits (M1) plus savings accounts, money market funds, and small time deposits, a key indicator of monetary conditions and potential inflation pressure.

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Analysis from May 14, 2026

What Is M2 Money Supply?

M2 is the broadest commonly tracked measure of the money supply, the total amount of cash, bank deposits, and near-cash assets available for spending in the US economy. It is the most important variable in monetarist economics (the school associated with Milton Friedman) and provides one of the most powerful long-term signals for inflation, asset prices, and economic cycles.

M2 matters because of a deceptively simple equation that underpins all of monetary economics:

MV = PQ (Money Supply × Velocity = Price Level × Real Output)

If M2 (money supply) grows faster than Q (real output) and V (velocity) is stable, then P (prices) must rise, that is, inflation occurs. This equation explains why the 40% M2 expansion of 2020-2021 was followed by the worst inflation in 40 years, and why the subsequent M2 contraction of 2022-2023 was followed by rapid disinflation.

What M2 Includes

M2 is a layered measure built from narrower definitions:

Component	What It Includes	Approximate Share
Currency in circulation	Physical notes and coins outside the Fed and bank vaults	~10%
Demand deposits	Checking accounts at commercial banks	~25%
Other checkable deposits	NOW accounts, ATS accounts	~5%
= M1	Sum of above	~40%
Savings deposits	Including money market deposit accounts (the largest M2 component)	~45%
Small time deposits	CDs under $100,000	~5%
Retail money market mutual funds	Money market funds available to retail investors	~10%
= M2	M1 + savings + small time deposits + retail money funds	100%

Total US M2 as of early 2025: approximately $21.5 trillion, roughly 77% of GDP.

The COVID M2 Experiment: A Natural Test of Monetarism

The Expansion (2020-2022)

The 2020-2022 period provided the most dramatic natural experiment in monetary theory since WWII:

Date	M2 Level	YoY Growth	What Happened
Feb 2020	$15.5T	+7%	Pre-COVID baseline
Feb 2021	$19.4T	+27%	QE + fiscal stimulus + direct checks
Feb 2022	$21.7T	+12%	Still growing rapidly
Peak	$21.7T (Mar 2022)	,	40% cumulative growth in 2 years

Mechanism: The expansion was driven by a combination never before seen in peacetime:

QE ($4.8 trillion in Fed bond purchases) created bank reserves
Fiscal stimulus ($5+ trillion in direct payments, PPP loans, enhanced unemployment) put money directly into household bank accounts
The money went straight into M2, it wasn't trapped in the banking system as QE1-3 had been, because fiscal policy bypassed the bank lending channel

The Inflation Response

CPI inflation followed M2 with a lag:

M2 Growth Peak	CPI Peak	Lag
February 2021 (+27% YoY)	June 2022 (9.1% CPI)	~16 months

The lag was explained by the velocity collapse: during lockdowns, people received stimulus checks but couldn't spend them (restaurants closed, travel banned, supply constrained). Velocity of M2 dropped from 1.37 (Q4 2019) to 1.10 (Q2 2020), a 20% decline. When the economy reopened and velocity recovered, the combination of excess money (high M2) and normalising velocity produced the inflation surge.

The Contraction (2022-2023)

For the first time since 1933-1934, M2 contracted year-over-year:

Date	M2 Level	YoY Growth
Mar 2022	$21.7T	+10%
Sep 2022	$21.5T	+3%
Mar 2023	$20.8T	-4.0%
Sep 2023	$20.7T	-3.8%
Mar 2024	$20.9T	+0.5%
Sep 2024	$21.2T	+2.5%

The contraction was driven by:

Fed QT draining bank reserves ($95B/month cap)
Banks tightening lending standards (reducing credit creation)
Consumer savings drawdown (spending down pandemic savings)

Monetarist prediction: M2 contraction → deflation or at minimum rapid disinflation. Actual outcome: CPI fell from 9.1% (June 2022) to ~3.0% (late 2024). The monetarist framework was directionally correct, M2 contraction predicted disinflation, but the economy avoided the recession that historical M2 contractions had always preceded.

The Equation of Exchange: MV = PQ

The Variables

Variable	Definition	Current Approximate Value
M (Money)	M2 money supply	$21.5 trillion
V (Velocity)	How many times each dollar is spent per year	~1.25 (GDP/M2)
P (Prices)	General price level (GDP deflator)	~135 (index)
Q (Output)	Real GDP	~$22 trillion (2017 dollars)

Why Velocity Matters

The equation of exchange shows that M2 alone doesn't determine inflation, velocity is equally important:

Scenario	M Growth	V Change	Inflation Outcome
Classic monetarism	+20%	Stable	~20% inflation
2010s QE	+8%/year	Declining 3%/year	~2% inflation (velocity offset the money growth)
COVID 2020-2021	+27%	Collapsed, then recovered	~8-9% inflation (delayed by velocity collapse, then amplified by recovery)
2022-2023 QT	-4%	Stable to rising	Rapid disinflation

The 2010s experience, when the Fed expanded M2 via QE but velocity declined, producing minimal inflation, led many to dismiss monetarism entirely. The COVID episode revived it: the combination of extreme M2 growth plus eventual velocity recovery produced exactly the inflation monetarists predicted, just with a variable lag.

M2 as a Trading Indicator

The Directional Signal

M2 growth provides a powerful medium-term (6-18 month) directional signal for inflation and asset prices:

M2 YoY Growth	Signal	Asset Implications
>12%	Extremely easy money	Inflation coming; long commodities, short duration, buy real assets
6-12%	Easy money	Supportive of risk assets; modest inflation pressure
3-6%	Normal growth	Neutral; consistent with 2% inflation + 2-3% real growth
0-3%	Tight money	Disinflationary; favourable for bonds and growth stocks
Negative	Very tight	Deflationary risk; recession risk elevated; long duration aggressively

M2 and Risk Assets

M2 growth has shown a strong correlation with risk asset performance, particularly over 12-18 month horizons:

S&P 500: Excess M2 growth (M2 growth minus nominal GDP growth) has a ~0.65 correlation with forward 12-month equity returns
Bitcoin: Even stronger correlation (~0.80) because crypto is the purest "liquidity asset", no earnings to anchor valuation
Gold: Moderate correlation (~0.50); gold responds more to real rate expectations than M2 directly
Housing: Strong correlation with a 12-24 month lag; excess money flows into property when deposit rates are low

The M2/GDP Ratio

The M2/GDP ratio measures how "monetised" the economy is, how much money exists relative to output. When this ratio rises sharply above trend (as it did in 2020-2021, reaching 0.90 vs. a pre-COVID trend of 0.70), the excess money eventually manifests as either:

Inflation (if velocity recovers and the money is spent)
Asset price inflation (if the money flows into stocks, housing, crypto)
Gradual normalisation (if the money is slowly absorbed by nominal GDP growth over years)

What to Watch

Weekly M2 release (Federal Reserve H.6, every Tuesday): Track the YoY growth rate. Direction matters more than level.
M2/nominal GDP ratio: Available quarterly. When significantly above the 0.70-0.75 long-term average, excess liquidity is present.
Velocity of M2 (FRED: M2V): Published quarterly. If velocity is rising alongside M2 growth, inflation pressure is accelerating.
Bank lending data (Federal Reserve H.8, weekly): Credit creation is the primary channel through which M2 grows beyond QE. Declining bank lending = M2 headwind.
Fiscal policy: Direct government transfers to households increase M2 instantly (bypassing bank lending). Track deficit spending as a supplement to M2 data.

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Frequently Asked Questions

▶Where can I track M2 money supply data?

The Federal Reserve publishes M2 data in its weekly H.6 Money Stock release (updated every Tuesday with data through the prior Monday). The FRED series M2SL provides the monthly seasonally adjusted level, while WM2NS provides weekly data. As of early 2025, US M2 is approximately $21.5 trillion. The most useful metric for trading is the YoY growth rate: above 8% signals easy monetary conditions (inflationary); below 0% signals tight conditions (deflationary). The M2-to-nominal-GDP ratio is a longer-term indicator of monetary excess — when this ratio rises significantly above trend (as it did in 2020-2021), the excess money eventually translates into inflation or asset price appreciation. For real-time context, compare M2 growth to nominal GDP growth: if M2 is growing faster than nominal GDP, there is excess liquidity in the system.

▶Did the post-COVID M2 explosion prove that "money printing causes inflation"?

The 2020-2023 experience was the strongest real-world confirmation of monetarist theory in decades. M2 grew approximately 40% cumulatively from February 2020 to February 2022 — from $15.5 trillion to $21.7 trillion — the largest monetary expansion since WWII. Inflation followed with a lag of 12-18 months, peaking at 9.1% CPI in June 2022. However, the relationship was not as clean as simple monetarism predicts: velocity collapsed initially (people saved stimulus checks), delaying the inflationary impact. When velocity normalised in 2021-2022, the combined effect of excess money plus normalising velocity produced the inflation surge. The subsequent M2 contraction (2022-2023) was followed by falling inflation, further supporting the relationship. The lesson: M2 growth is a necessary but not sufficient condition for inflation — velocity must cooperate, which adds a variable lag of 6-24 months that makes M2 a poor timing tool but a powerful directional signal.

▶What happened during the unprecedented M2 contraction of 2022-2023?

For the first time since the 1930s Great Depression, US M2 contracted on a year-over-year basis — declining approximately 4.4% from its March 2022 peak of $21.7T to a trough near $20.8T in late 2023. The contraction was driven by: (1) Fed QT draining reserves from the banking system; (2) Banks tightening lending standards after SVB's failure; (3) Consumers spending down pandemic savings (which had swelled M2 through deposits). Historically, M2 contractions of >2% have been associated with severe economic downturns — this was the strongest signal supporting the "hard landing" thesis in 2023. The fact that the economy avoided recession despite this contraction surprised many monetarists and suggested that the M2 overshoot of 2020-2021 was being worked off rather than representing a new deflationary episode. By mid-2024, M2 began growing again (2-3% YoY), normalising the situation.

▶How does M2 relate to the Fed's balance sheet and QE?

QE directly increases M2 through the following mechanism: The Fed buys Treasuries from a bank → the Fed credits the bank's reserve account (increasing reserves) → the bank now has more reserves than it needs → excess reserves support additional lending → loans create deposits → M2 increases. However, the QE-to-M2 relationship is not 1:1 because banks don't always lend their excess reserves — they may hold them as a buffer (as happened initially in 2008-2013 when QE expanded reserves but M2 grew slowly). During COVID, the relationship was turbocharged because fiscal stimulus (direct checks to households) simultaneously created deposits in bank accounts — the money went directly into M2, bypassing the bank lending channel. This is why M2 grew 40% during COVID-era QE+fiscal but only grew ~30% during the much larger cumulative QE of 2008-2014. The fiscal-monetary policy combination matters more than either alone.

▶Should I use M2 as a trading indicator?

M2 is best used as a medium-to-long-term directional indicator (6-18 month horizon), not a timing tool. The most reliable signals: (1) YoY M2 growth above 10% sustained → inflation will follow with a 12-18 month lag → position for inflation (commodities, TIPS, short duration). (2) YoY M2 growth below 0% sustained → deflationary pressure building → position for disinflation (long duration, growth stocks). (3) M2/GDP ratio well above trend → excess liquidity seeking a home → bullish for risk assets in the near term, but inflationary medium-term. The main limitation: velocity is unstable and can offset M2 changes for extended periods. During the 2010s, M2 grew steadily but velocity declined, producing minimal inflation. The best approach is to track M2 alongside velocity (using the Equation of Exchange: MV=PQ) and focus on periods where both are moving in the same direction — those are the highest-confidence inflation/deflation signals.

M2 Money Supply is one of the signals monitored daily in the AI-driven macro analysis on Convex Trading. The platform synthesises data across monetary policy, credit, sentiment, and on-chain metrics to generate actionable trade recommendations. Create a free account to build your own signal layer and see how M2 Money Supply is influencing current positions.

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