What Is M2?
M2 is the U.S. Federal Reserve's estimate of the total money supply, including all the cash people have on hand, plus all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). Retirement account balances and time deposits above $100,000 are omitted from M2.
The Federal Reserve tracks a separate money supply number, M1, that includes currency in people's pockets or their checking accounts and savings accounts. The money deposited in time deposits and money market funds is not counted in M1. For the Fed's purposes, this is "near money." That is, the funds cannot be used as a medium of exchange and are not instantly convertible to cash.
Key Takeaways
- M2 is a measure of the money supply that includes cash, checking deposits, and other deposits readily convertible to cash, such as CDs.
- M1 is an estimate of cash, checking, and savings account deposits only.
- The weekly M2 and M1 numbers are closely monitored as indicators of the overall money supply. Too-fast growth in the numbers can be a warning sign of inflation.
- Another money supply number, M3, includes all of the above plus large institutional cash deposits. The M3 is published quarterly.
- Gold is not counted in M1, M2, or M3. In the modern world, gold is no longer used as a common currency.
Understanding M2
Measuring the money supply of an economy is a challenging proposition. Due to the complexity of the concept of "money" and the size and level of detail of an economy, there are multiple ways of measuring a money supply.
These measures are typically classified as "M" s and fall along a spectrum from narrow to broad monetary aggregates. Typically, the "M" s range from M0 to M3, with M2 representing a fairly broad measure.
M2 is a more comprehensive calculation than M1 because it includes assets that are highly liquid but are not intended to be routinely used as cash. Consumers and businesses don't usually use time deposits when making purchases or paying bills, but in a pinch, they could convert them to cash in short order.
13 includes numbers on large-time deposits, institutional money market funds,and other large liquid assets. This is published on a quarterly basis.
M1 and M2 Reporting Times
The Federal Reserve releases M1 and M2 numbers every Thursday at 4:30 p.m. The St. Louis Fed tracks the numbers.
Economists usually use the broader M2 number when discussing the money supply because modern economies often involve transfers between different account types.
For example, a business may periodically transfer $10,000 from a money market account to a checking account. This transfer would increase M1, which doesn’t include money market funds, while keeping M2 stable since it contains both accounts.
M2 Uses
M2 is a critical factor in forecasting inflation. Inflation and current interest rates have major ramifications for the general economy, as they heavily influence job availability, consumer spending, business investment, currency strength, and trade balances.
Changes in Money Supply
The Federal Reserve's dual mandate is price stability and maximum sustainable employment. One of the ways it works to maintain price stability is by manipulating the M2 money supply.
The M2 numbers provide important insight into the direction, extremity, and efficacy of central bank policy.
M2 has consistently been growing. It was $4.7 trillion on Jan. 3, 2000, and was $20.8 trillion on March 2, 2024. The most extreme growth occurred from Feb. 2020 to June 2020 during the Coronavirus pandemic when M2 jumped from $15.3 trillion to $18 trillion. Other large increases have also coincided with economic weakness, during which expansionary monetary policy was deployed by the central bank.
What Is the Value of M2 Now?
The M2 was $20.8 trillion in March 2024. That's how much cash Americans had in their wallets, checking accounts, and short-term savings accounts.
What Happens When the M2 Money Supply Increases?
When there is more cash out there, more cash is spent. A little more can be good. A lot more can increase the risk of inflation. That's why the Federal Reserve constricts the money supply when the inflation rate rises—it is trying to slow down spending to control the inflation rate.
Is M2 a Leading Economic Indicator?
M2 is seen as a reliable predictor of inflation, so it might be counted among the leading economic indicators. M3 is considered by some economists to be an even better predictor of inflation. This is published quarterly rather than monthly and includes data on large liquid assets held by financial institutions.
The Bottom Line
The Federal Reserve isn't keeping track of how much cash you've got in your wallet, but it has a pretty good idea of how much cash we (as a population) have at any given time. The important point isn't the number but how the number is increasing or decreasing from month to month. Too much cash is seen as a warning sign of a growing threat of inflation.
FAQs
M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.
What is the M2 definition of the money supply? ›
M2 is a measure of the money supply that includes cash, checking deposits, and other deposits readily convertible to cash, such as CDs. M1 is an estimate of cash, checking, and savings account deposits only. The weekly M2 and M1 numbers are closely monitored as indicators of the overall money supply.
What is the meaning of M2? ›
M2 is a measure of money supply, referring to a certain portion of the money contained in an economy. Economists use M followed by a number to designate certain portions of money supply.
What is the M2 definition of the money supply quizlet? ›
M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.
What is the M2 measure? ›
The Modigliani-Modigliani measure, also known as the M2 measure, is used to derive the risk-adjusted return of an investment. It shows the return on an investment adjusted for risk in comparison to a benchmark. It is shown as units of percentage return.
What does M1 and M2 mean in money supply? ›
M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks. Back to glossary.
What does the definition of M2 include quizlet? ›
M2 money supply is the money supply that includes currency, checking accounts in banks, traveler's checks, savings deposits, money market funds, and certificates of deposit.
What is the difference between M2 and M3 money supply? ›
M2: M1 plus deposits with an agreed maturity up to two years plus deposits redeemable at a period of notice up to three months. M3: M2 plus repurchase agreements plus money market fund (MMF) shares/units, plus debt securities up to two years.
What happens when M2 money supply decreases? ›
"You can't really have a growing economy when the M2 money supply is decreasing," he warned. "Zero percent growth of money supply means unemployment, recession, and deflation," he later added.
What is an example of M2? ›
A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank.
Credit cards are not included in either M1 or M2. It is not money but instead a pre-approved credit line. By using a credit card you are not transferring your money to the seller. You are transferring the bank's money to the seller and now owe the bank money.
What is the difference between M1 and M2 money supply and how they are measured? ›
Money is measured with several definitions: M1 includes currency and money in checking accounts (demand deposits). Traveler's checks are also a component of M1, but are declining in use. M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds.
How to interpret M2 measure? ›
The M2 measure helps identify superior portfolio performance by considering both the excess return and the risk associated with a benchmark. A higher M2 measure indicates that the portfolio has achieved a greater risk-adjusted return than the benchmark and the risk-free rate.
How to interpret m squared? ›
If M-Squared is zero, then the manager (portfolio) has the same risk-adjusted return as the market. If M-Squared return is negative, the manager (portfolio) has a lower risk-adjusted return than the market.
What is the M2 compared to? ›
GPU Cores - Graphics Performance
One of the main differences between the M1 and the M2 chip is the number of GPU cores. The M1 chip has 8 cores, while the M2 chip has 10 cores, allowing the M2 chip to provide up to 25% higher graphics performance than the M1 while at the same power level.
What is example M2? ›
A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank.
Is M2 the same as m? ›
The confusion arises as 1m x 1m= 1 square meters while 1 meter squared is also same. But in all other cases, square meters are entirely different than meters squared and hence one should be careful when using either of the two terms. Q. The length of a room is 30 m.
