Inflation has been discussed more in 2023 and 2024 than possibly ever.
In recent years, the Federal Reserve has gained significant attention, unfortunately not for positive reasons. A lot of this is about inflation. It’s the government’s responsibility to steer the country’s course through laws and regulations, a concept termed fiscal policy. On the other hand, the Federal Reserve, often referred to as the “central bank,” is tasked with managing the nation’s monetary needs, known as monetary policy.
While not the most captivating topic, it’s frequently misunderstood by many Americans, leading to varying perceptions.
Today, Ed Butowsky will delve into M1 and M2, which refer to two key measures of the money supply. They both play a role when it comes to inflation.
Before we proceed, here are concise explanations of both:
M1 refers to the total amount of currency in circulation plus demand deposits (checking accounts and other deposits that can be accessed on short notice).
M2 refers to M1 plus savings deposits, small-time deposits (less than $100,000), and money market mutual funds held by individuals.
Summary:
- It is the Fed’s job to control inflation and use monetary policy to bring about positive change to our nation’s economy.
- M1 and M2 are two different measures of the money supply, but M2 is strongly correlated to the rate of inflation as seen in the chart shown in the video and below.
- The Fed has complete control over the monetary base which is essentially all of the money in circulation + the money kept in reserve at the Fed. In addition, they are able to stimulate or cool down the economy by way of trading Treasury securities in the open market.
Thank you for reading this week’s “Making Sense with Ed Butowsky” article. To view the rest of Ed’s articles, you can click here or you can also check out Ed’s personal website to learn more about him.
For more information, email Jordan McFarland at jordan@chapwoodinvestments.com.
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