U.S. M2 Money Supply Hits Record $21.94 Trillion, 4.5% Yearly Growth

The U.S. M2 money supply, a comprehensive measure of money circulation, has reached a new record high of nearly $22 trillion, specifically $21.94 trillion, in May. This figure surpasses the previous peak of $21.72 trillion recorded in March 2022. The year-on-year growth rate of the M2 money supply stands at 4.5%, marking the highest growth rate in nearly three years.

According to the St. Louis Federal Reserve, an increase in the M2 money supply tends to have a lagged effect on inflation. This means that changes in the M2 money supply may not immediately impact inflation but could influence it over time. Historically, the personal consumption expenditures (PCE) inflation index, which is the Federal Reserve's preferred measure of inflation, began rising in February 2021. This increase followed a significant surge in M2 growth that started in February 2020. The PCE inflation index then followed the M2 growth lower in 2023, indicating a correlation between the two.

If this historical pattern holds, the recent uptick in the M2 growth rate could contribute to inflation in the coming months. This potential increase in inflation could make it more challenging for the Federal Reserve to lower interest rates to as low as 1%, as previously suggested by President Donald Trump. The relationship between the M2 money supply and inflation is complex, and while a growing money supply can signal economic growth and looser financial conditions, it can also lead to inflation if it outpaces the economy. This dual effect creates a mixed message for investors, particularly those involved in riskier assets like cryptocurrencies.