Economics · Foundations
Money supply and M2: what it measures and what it tells you
What M1 and M2 include, how banks and the Fed change the money supply, the velocity arithmetic, and what M2 and CPI did from the 1960s through 2026.
On this page
The money supply is the total amount of money that households and businesses hold in forms they can spend quickly: currency, checking and savings balances, small time deposits and retail money market funds. In the United States the Federal Reserve publishes two headline measures, M1 and M2, in its monthly H.6 release. In September 2026, M2 stood at about $23.4 trillion, seasonally adjusted.
M2 became a market talking point after 2020, when it grew faster than at any time in its history and inflation followed. Then it did something it had never done before: it shrank on a year-over-year basis. This guide explains what M2 contains, how money gets created and destroyed, the velocity arithmetic that links money to spending, and what six decades of data say about M2 as an inflation signal, including where that signal has failed.
What counts as money: M1 and M2
The H.6 defines the aggregates from the most liquid outward.
M1 is:
- currency held by the public (outside the Treasury, the Federal Reserve Banks and bank vaults),
- demand deposits at banks, and
- other liquid deposits: NOW and similar checkable accounts, credit-union share drafts and savings deposits, including money market deposit accounts.
M2 is M1 plus:
- small-denomination time deposits (certificates of deposit under $100,000), and
- balances in retail money market funds,
minus IRA and Keogh retirement balances held at banks and money funds.
What M2 leaves out matters too: Treasury bills, stocks, bonds, institutional money market funds and large CDs are not in it, even though some are nearly as liquid. M2 is a measure of household-style spending money, not of all liquid wealth.
How money is created and destroyed
Most of M2 is bank deposits, and deposits change in a few main ways.
- Bank lending. When a bank makes a loan, it credits the borrower's account with a new deposit. M2 rises. When the loan is repaid, the deposit is extinguished and M2 falls.
- Fed asset purchases. When the Fed buys a Treasury security from a non-bank investor, the seller's bank account is credited and the bank receives new reserves. M2 rises. When the Fed lets securities mature without replacing them (Quantitative easing and tightening: the Fed’s balance sheet), the process runs in reverse.
- Government deficits. When the Treasury spends borrowed money, deposits move into private hands. If banks or the Fed end up holding the new Treasuries, net deposits rise.
- Shifts out of M2. When short-term rates rise, savers can move cash from bank deposits into Treasury bills or institutional products that are outside M2. M2 falls even though nobody spent anything.
The Fed does not set M2 directly. Since the 1980s it has steered the price of money, the federal funds rate, and let the quantity adjust.
The velocity arithmetic
Economists link money to spending with an accounting identity, the equation of exchange:
The identity is always true, by definition. The theory built on it, the quantity theory of money, adds an assumption: if velocity is stable and real output grows at its own pace, faster money growth must end up as higher prices. The data show why that assumption needs care. Velocity rose from about 1.8 in 1960 to a peak near 2.19 in Q3 1997, then fell for two decades, collapsed in 2020 as people held cash they could not spend, and has only partly recovered since.
What the data show
The 1970s. M2 grew about 9.5% a year on average during the decade and CPI inflation averaged about 7.1%. Both money growth and inflation were high and persistent.
The 2010s. M2 grew about 5.8% a year on average, while CPI inflation averaged 1.8%. Money growth well above inflation produced no price surge, because velocity kept falling. Anyone who used M2 alone to forecast inflation in that decade was wrong year after year.
2020–2022. M2 went from $15.49 trillion in February 2020 to $21.77 trillion in March 2022, a rise of about 40.5% in two years. Year-over-year growth peaked at 26.8% in February 2021. CPI inflation, which had been near 2%, reached about 9.0% year over year in June 2022 (seasonally adjusted series), about 16 months after the M2 peak. This episode is the strongest modern case for watching money: an unprecedented surge in M2 was followed by the highest inflation in four decades.
2022–2024. M2 then fell to $20.71 trillion in October 2023, about 4.9% below its peak. Year-over-year growth was negative every month from December 2022 to February 2024, bottoming at −4.7% in April 2023, the first declines since the series began in 1959. CPI inflation came down over the same period but stayed positive; prices did not fall.
2025–2026. M2 regained its 2022 high in May 2025 and kept rising, to $23.41 trillion in September 2026, up 5.7% from a year earlier. Over the same twelve months CPI rose 3.7%.
Pitfalls and limitations
- Velocity moves. The quantity theory only predicts prices if velocity is steady. It has not been since the 1990s, so a given M2 growth rate can go with very different inflation rates.
- Shifts between M2 and non-M2 assets. When short-term rates rise, savers move cash into Treasury bills and other instruments outside M2. M2 can shrink without any tightening of spending power.
- Lags are long and variable. Even in 2020–2022, the inflation peak came more than a year after the M2 peak. Shorter windows show almost no relationship.
- Revisions and seasonal adjustment. M2 is revised, and the seasonally adjusted figures can change. Small monthly moves are mostly noise.
- Definitions change. The 2020 change to M1 shows that a measure can jump because of a rule, not behavior. Check the H.6 notes before comparing across a break.
Money measures compared
| Measure | What it includes | Typical use |
|---|---|---|
| Monetary base | Currency plus bank reserves held at the Fed | What the Fed creates directly |
| M1 | Currency, demand deposits, other liquid deposits incl. savings | Transaction money (definition changed 2020) |
| M2 | M1 + small time deposits + retail money funds − IRA/Keogh | Broad spending money; the headline measure |
| Fed balance sheet | The Fed's securities and loans | Tracks QE and QT (Quantitative easing and tightening: the Fed’s balance sheet) |
| Velocity of M2 | Nominal GDP ÷ M2 | How intensively money is being used |
How Finabase does it
Finabase does not publish M2, the H.6 release or any other money-supply data, and the chart on this page is ours, built from public Federal Reserve and BLS series. What the app does show are the market prices that money and Fed policy act on: short-term rates on the Treasury page, where the 1-month to 1-year yields sit close to the Fed's policy rate and set the return on cash that competes with bank deposits, and Fed-related coverage in the Fed news topic.
Frequently asked questions
What is included in M2?
M2 includes currency held by the public, checking and savings deposits, small time deposits under $100,000 and retail money market fund balances, minus IRA and Keogh balances. It excludes stocks, bonds, Treasury bills, large CDs and institutional money funds.
Does a rising money supply always cause inflation?
No. In the 2010s M2 grew about 5.8% a year while CPI inflation averaged 1.8%, because the velocity of money kept falling. A very large surge, as in 2020–2021, has been followed by inflation, but ordinary changes in M2 are a poor guide to the next year's inflation on their own.
Why did M2 fall in 2022 and 2023?
The data show M2 falling from $21.77 trillion in March 2022 to $20.71 trillion in October 2023, while the Fed raised rates and shrank its balance sheet. Higher rates also gave savers a reason to move cash into assets outside M2, such as Treasury bills. The year-over-year declines from December 2022 to February 2024 were the first in data that start in 1959.
How often is M2 published?
The Federal Reserve publishes the H.6 Money Stock Measures release monthly, with seasonally adjusted and unadjusted monthly figures for M1 and M2.
Summary
M2 is the Federal Reserve's broad measure of spending money: currency, checking and savings deposits, small time deposits and retail money market funds. Banks create most of it by lending, and the Fed adds to or drains it through asset purchases and runoff. The equation of exchange links M2 to nominal GDP through velocity, but velocity has swung widely, from about 2.19 in 1997 to 1.13 in 2020 and 1.42 in 2026, so money growth is a poor inflation forecaster in normal times. The exception proves the point: M2's 26.8% surge to February 2021 was followed by inflation near 9% in 2022, and its first-ever declines in 2023 came as inflation cooled. Treat M2 as a signal for extremes, read alongside rates and prices, not as a dial for inflation.
Sources and further reading
- Board of Governors of the Federal Reserve System — H.6 Money Stock Measures (current release and notes)
- Board of Governors of the Federal Reserve System — About the H.6 release
- Board of Governors of the Federal Reserve System — H.6 announcements (savings deposits moved into M1, effective May 2020 data)
- Federal Reserve Board — M2 money stock, SA (FRED series M2SL), downloaded 2026-10-30
- BLS — CPI-U all items, SA (FRED series CPIAUCSL), downloaded 2026-10-30
- BEA — Gross domestic product, nominal (FRED series GDP), downloaded 2026-10-30