Fed Revives M2 Monitoring to Sharpen Inflation Outlook

The inclusion of M2—which encompasses currency, bank deposits, and money market shares—in the Fed’s latest Monetary Policy Report acts as a hedge against future forecasting blind spots. Warsh, who framed the inclusion as an intentional signal to his peers, maintains that a modern central banker must synthesize diverse inputs rather than relying on a single metric. Proponents argue that a keener eye on money growth might have alerted officials to the inflationary surge that followed the 27% spike in M2 during early 2021, a period when price pressures were often dismissed as transitory.

Former St. Louis Fed leader James Bullard and analysts at Deutsche Bank suggest that while the velocity of money remains volatile, excess supply correlates with long-term price trends. This perspective is gaining traction even among former policy doves; Stephen Miran, once a staunch advocate for aggressive rate cuts, now concedes that a renewed acceleration in money growth could necessitate a tighter policy stance.

However, the return of monetarist-leaning analysis faces stiff resistance from skeptics who argue the fundamental relationship between money supply and economic activity fractured decades ago. Critics, including former Fed staffer William English and representatives from Wrightson ICAP, contend that post-pandemic inflation was primarily driven by fiscal stimulus rather than monetary expansion. For these observers, the Fed’s focus on M2 risks misinterpreting the role of bank reserves, which often remain trapped outside the broader economy, rendering them poor indicators of immediate inflationary pressure.