Five facts on the money supply

Five Facts on the Money Supply

The Big Insight: At the start of the pandemic, the Federal Reserve rapidly expanded the supply of money in our economy to help stave off a recession. But now, the money supply is growing slower than any time since the Great Depression.

The Federal Reserve oversees the nation’s money supply — the total amount of cash, coins, bank balances, and other liquid instruments in circulation. In addition to raising and lowering interest rates, the Fed can choose the rate at which it creates new currency, which can impact both economic activity and inflation.

Here are five facts on America’s money supply.

1. The broadest Federal Reserve measure of the U.S. money supply is up 36% since before the pandemic.

The Fed measures the money supply in several ways, but under the broadest and most widely used measure, the current U.S. money supply is about $21.8 trillion dollars. That’s compared to just under $16 trillion in early March 2020. During the pandemic, the Fed created nearly four times as much money as had been issued in the two preceding years. Today’s money supply is three times what it was 25 years ago in today’s dollars.

2. During the pandemic, the Fed purchased at least $120 billion per month in securities.

The Fed created dollars during the pandemic, and used much of the new money to buy bonds in an effort to hold down long-term interest rates. In June 2020, the Fed set a rate of purchase of at least $80 billion in Treasuries and $40 billion in residential and commercial mortgage-backed securities each month. It reduced the rate of these purchases in late 2021 and ended purchasing earlier this year.

3. More than $2 trillion of the money created during the pandemic was not spent.

The Fed purchased nearly $5 trillion in mortgage-backed and government securities in all. However, the banks that the Fed paid did not spend more than $2 trillion of that money and instead “parked” it, keeping it out of circulation while seeking investment opportunities. Some economists say this limited the impact of the Fed’s purchases on inflation.

4. The growth in U.S. money supply is now at its slowest rate since the Great Depression.

With the end of pandemic lockdowns in the U.S. and the increase in inflation, the Fed is now significantly slowing money supply growth. “Deposit liabilities” — all the deposits at a bank except for term deposits — are a fair measure of the broad money supply. Since the start of 2022, deposit liabilities have grown at an annual rate of just 0.4%, compared to 18% growth during 2020 and 2021. The long-term average is about seven percent.

5. China’s money supply is up 10.5% since before the pandemic.

China also increased its money supply during the pandemic, but kept it more tightly controlled. Beijing regulates its money supply through a process called “sterilization.” The People’s Bank of China increases the supply of currency domestically, but offsets this by selling the same amount in currency bonds, removing the excess cash from open markets. China also requires commercial banks to keep a percentage of total deposits with the PBOC.