M2, a measurement of the money supply, is a critical factor in the forecasting of issues like inflation. Inflation and interest rates have major ramifications for the general economy, as these heavily influence employment, consumer spending, business investment, currency strength, and trade balances. In the US, the Federal Reserve publishes money supply data every Thursday at 4:30 p.m., but this only covers M1 and M2. Data on large time deposits, institutional money market funds, and other large liquid assets are published on a quarterly basis and are included in the M3 money supply measurement.
This century alone, M2 has been growing. In each of these years; 2001, 2008, 2011 and 2020, the Fed pushed it a notch higher. These years coincide with periods of economic weakness.
So, how has the Fed reacted this year?
First, it's important to understand that the Fed's dual mandate is to manage unemployment and inflation.
This century alone, M2 has been growing. In each of these years; 2001, 2008, 2011 and 2020, the Fed pushed it a notch higher. These years coincide with periods of economic weakness.
So, how has the Fed reacted this year?
First, it's important to understand that the Fed's dual mandate is to manage unemployment and inflation.
- Interest rates
The Fed has lowered interest rates as it did back in 2008. This has lowered the cost of borrowing.
- Paycheck Protection Programme
In accordance with the CARES act, the Fed started a program that enabled businesses to keep paying their employees. This has helped reduce unemployment from 13.3% in May to 7.9%.
- Main Street Lending
Five facilities have been setup for lending to businesses and NGOs.
- Treasury Securities
The Fed ramped up its purchases of Treasury securities. It bought around $1.7 trillion worth between mid-March and the end of June. The Fed also increased its purchases of mortgage-backed securities. In general, the Fed’s purchases of securities keep markets working when assets are otherwise difficult to sell. The purchases also inject cash into the economy, and convey to the public that the Fed stands ready to backstop important parts of the financial system.
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