Over the past year, growth in the M2 measure of money supply in the USA1 has slowed from 27.1% y/y in February 2021 to 9.5% y/y in March 2022. This has mainly been due to the moderation in purchases, by the Federal Reserve (Fed) and banks, of Treasuries (blue bars) and mortgage-backed securities (MBS, hatched green bars). With the Fed having ended its net purchasing at the end of February 2022, the effect of QE was even smaller in Q1 2022. Since Q2 2021, the Fed’s repo arrangements with money market funds (light grey bars) have also resulted in the (temporary) destruction of money2.
United States: counterparts’ contributions to the annual growth rate of M2*Other factors have pulled in the opposite direction. The reduction in the Treasury’s holdings at the Fed (hatched blue bars), as it financed economic support packages, served to increase deposits with commercial banks. Depressed by a substantial comparison effect in 2021 (97% of outstanding guaranteed loans to enterprises issued in 2020 were forgiven in 2021), bank lending (green bars), the traditional engine of money creation, came back to life in Q1 2022.
The normalisation of US monetary policy is likely to prolong this slowdown. On the one hand, the increase in policy interest rates could temporarily boost the attractiveness of the Fed’s reverse repo facility and of term deposits3 for bank customers. Meanwhile, the rapid tightening of monetary policy could weaken the credit channel. On the other hand, from 1 June, the Fed will stop fully reinvesting all maturing debt in its securities portfolio. Some non-banking entities will acquire newly issued Treasuries and MBS, thus reducing their deposits.
