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Money Supply


Definition

The monetary aggregates are alternative measures of the money supply by degree of liquidity. Changes in the monetary aggregates indicate the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures.

Why do Investors Care?

To be honest, the various money supply measures don´t matter to most investors these days. The monetary aggregates (known individually as M1, M2, and M3) used to be all the rage a few years back because the data revealed the Fed´s (tight or loose) hold on credit conditions in the economy. The Fed issues target ranges for money supply growth. In the past, if actual growth moved outside those ranges it often was a prelude to an interest rate move from the Fed. Today, monetary policy is understood more clearly by the level of the federal funds rate.

Money supply fell out of vogue in the nineties, due to a variety of changes in the financial system and the way the Federal Reserve conducts monetary policy. The Fed is working on some new measures of money supply, and given the way economic indicators ebb and flow in popularity, don´t be surprised if the monetary aggregates make a comeback in the future.





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