Does the M1 Money Supply Include Savings Accounts?
Understand the evolving definition of M1 money supply. Learn if savings accounts are now included and why this key change occurred.
Money supply refers to the total amount of money circulating within an economy. This concept is important for understanding economic activity, as it influences factors like inflation, interest rates, and overall economic growth. Economists and policymakers analyze different measures of money supply to gauge the liquidity available for transactions and investments throughout the financial system.
What is M1 Money Supply
M1 money supply represents the most liquid forms of money available in an economy. It includes currency in circulation (physical cash and coins held by the public). M1 also encompasses demand deposits (funds in checking accounts). Other liquid deposits, such as traveler’s checks and other checkable deposits like Negotiable Order of Withdrawal (NOW) accounts and Automatic Transfer Service (ATS) accounts, are part of M1. As of May 2020, the definition of M1 was expanded to include savings deposits and money market deposit accounts (MMDAs), reflecting their increasing liquidity.
Characteristics of Savings Accounts
Savings accounts are designed primarily for individuals to store money securely and earn a modest return over time. These accounts typically accrue interest, allowing the deposited funds to grow. While they offer a safe place for funds, savings accounts generally have limitations on the number of withdrawals or transfers that can be made within a specific period. Unlike checking accounts, savings accounts are not typically used for daily spending. They serve as a tool for short-term savings goals, providing easy access to funds when needed.
How Savings Accounts Relate to M1
Historically, savings accounts were not included in the M1 money supply, categorized instead under M2 due to being less liquid than checking accounts and currency. The Federal Reserve changed this in May 2020 to reflect modern banking practices and the increased ease with which consumers can transfer funds between account types. Advancements in technology and the elimination of certain transfer limits made savings accounts functionally similar to demand deposits in terms of liquidity. Consequently, the current M1 money supply now fully incorporates savings accounts, acknowledging their role as highly liquid assets readily available for transactions.
Other Categories of Money Supply
Beyond M1, M2 is a broader measure of the money supply. M2 includes all components of M1, plus additional assets that are less liquid but easily convertible to cash. These additional components include small-denomination time deposits, such as certificates of deposit (CDs). M2 also incorporates retail money market mutual fund balances, which are investment funds that purchase short-term, low-risk securities. This wider measure provides a more comprehensive view of the total money available for spending and investment in the economy, encompassing assets that serve as short-term savings vehicles.