How Is the M2 Money Supply Calculated?

The M2 money supply broadly measures the total money available within an economy. It includes highly liquid financial assets readily convertible into cash. As a key monetary aggregate, M2 provides insights into the overall availability of money, influencing economic activity and price levels. Understanding its composition is important for quantifying the money supply.

Components of M1

M1 represents the most liquid forms of money, directly used for transactions. It forms the foundational layer for the broader M2 money supply. M1 primarily consists of currency in circulation, demand deposits, and other checkable deposits.

Currency in circulation includes physical cash, such as paper money and coins, held by the public. This excludes currency held within bank vaults or by the U.S. Treasury and Federal Reserve Banks. This money is actively used for day-to-day purchases and exchanges.

Demand deposits are funds in checking accounts at financial institutions, withdrawable without prior notice. These accounts are convenient for managing daily expenses, writing checks, or using debit cards. While some may earn minimal interest, their primary function is to facilitate immediate access to funds.

Other checkable deposits (OCDs) include interest-bearing checking accounts. These can take forms such as Negotiable Order of Withdrawal (NOW) and Automatic Transfer Service (ATS) accounts. These accounts combine features of checking and savings, allowing for check-writing capabilities while potentially earning interest. Credit union share draft accounts also fall under this category.

Components Beyond M1 Included in M2

To arrive at the M2 monetary aggregate, additional components less liquid than M1 but still easily convertible to cash are added. This broader measure provides a more comprehensive view of the money supply. These components include savings deposits, small-denomination time deposits, and retail money market mutual funds.

Savings deposits are interest-bearing accounts at banks where funds are typically accumulated, not used for frequent transactions. While they generally do not offer direct check-writing privileges, funds are readily accessed through withdrawals. These accounts allow individuals to save money while earning a modest return.

Small-denomination time deposits are certificates of deposit (CDs) issued in amounts generally less than $100,000. These deposits have a fixed maturity date, ranging from a few months to several years, and typically incur penalties for early withdrawal. They usually offer a higher interest rate than savings accounts due to the commitment of keeping funds deposited for a specific term.

Retail money market mutual funds (MMMFs) pool money from individual investors to invest in short-term, highly liquid debt instruments. These funds aim to maintain a stable net asset value, often at $1.00 per share, and provide current income. Only retail MMMFs, those primarily held by individual investors, are included in M2, not institutional funds.

Sources and Reporting of M2 Data

The Federal Reserve, as the central bank of the United States, compiles and publishes M2 data. This data is a significant indicator for economists and policymakers, offering insights into the overall liquidity within the financial system. The Federal Reserve collects this information from a wide range of financial institutions.

The official release for M2 data is the Federal Reserve’s H.6 Money Stock Measures statistical release. This report provides detailed information on the money supply’s components. While historically updated weekly, the M2 data series is now primarily updated monthly.

The data in the H.6 release is typically available towards the end of each month. This allows for consistent dissemination of information regarding the nation’s money stock. The compiled figures are important for analysts monitoring economic trends and the availability of money for commerce and investment.