US may avoid recession on M2 decline, says Fed official James Bullard
A sharp decline in the M2 measure of US money supply could be good news for policymakers in their efforts to bring high inflation under control, said James Bullard, President of the St. Louis Fed.
“M2 exploded during the pandemic and correctly predicted we were going to get inflation, and now if you look at the same chart M2 growth has slowed dramatically,” he told an audience in St. Louis on Thursday. “That bodes well for disinflation, but in recent readings it has actually turned negative.”
M2, which measures cash in circulation plus dollars in bank and money market accounts, rose more than 40% during the pandemic as the central bank flooded financial markets with emergency liquidity.
It peaked at $21.7 trillion in March 2022 and has since declined to $21.4 trillion in November. If the downtrend continues, it would provide the first annual decline since records began in the 1950s.
The St. Louis Fed has long advocated examining monetary aggregates to provide insight into inflation. Bullard described himself as a “monetarist at heart,” but acknowledged why the practice has fallen out of favor with central bankers.
“It was just difficult to correlate with inflation figures at high frequency. I think that was the main problem,” he said. “But inflation is certainly a monetary phenomenon. That’s why it’s called monetary policy.
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