After 40 Years, the Fed Revisits M2: Does More Money Necessarily Mean Inflation?

Why does money seem to buy less?

When too much money is in circulation, money loses value. At the Jackson Hole symposium on August 28, Fed Chair Warsh brought that explanation back into the discussion. He said that paying attention to money had fallen out of fashion, but that, in his view, the quantity of money mattered. This was one of his six policy principles, not a passing comment.

What does it mean to say that money matters?

The point is not a slogan. It means the Fed is putting the amount of money circulating in the economy back on its watchlist. That quantity has a specific measure: broad money, or M2. The last time the Fed put monetary aggregates at the centre of its policy attention was during the Volcker era in the 1980s. Over the intervening 40-plus years, the mainstream view was that money supply and inflation no longer had a meaningful relationship.

Why did money receive less attention for 40 years?

After the 1980s, financial innovation blurred the boundaries between different forms of money. The relationship between M2 and inflation became less stable, and central banks shifted their attention to interest rates and inflation expectations rather than monetary aggregates. After the 2008 financial crisis, some even argued that money had ceased to matter: if so much money could be created without bringing inflation back, what use was the measure?

How did money and prices become linked again?

From 2020 to 2022, the Fed injected substantial liquidity to support the economy. Annual M2 growth reached 26.8% in February 2021, a record high.

Sixteen months later, in June 2022, US CPI inflation reached 9.1%, according to the BLS measure released in July 2022, its highest level since 1981. Money expanded first, and prices followed with a lag of about 16 months. That comparison gave renewed weight to the idea that money matters. In 2023, M2 growth briefly fell to -4.6%, and inflation also eased.

What should we watch next?

The latest figures show annual US M2 growth returning to 5.4% in July 2026, the fastest pace since July 2022. Money is expanding again. Will inflation pick up as well?

Three dates to watch:

September 4: nonfarm payrolls.

September 11: inflation.

September 16: the dot plot.

If money really is returning to the policy agenda, understanding the Fed will require looking beyond interest rates to how it manages money.

Our observation

The Fed's renewed attention to M2 after 40 years is no coincidence. It represents a reassessment of the current market environment.

The era of focusing only on interest rates is drawing to a close. A new period of watching monetary aggregates and the amount of money in the market has arrived.

Whether you are investing, managing your savings or trying to understand prices, do not focus solely on changes in interest rates. Changes in M2 growth are the underlying signal behind inflation and market movements.