The money supply is positive now that inflation remains above 3 percent

Annual U.S. money supply growth reached positive levels in April for the first time since November 2022, countering the effects of higher interest rates as inflation hovers above 3 percent.

The expanded money supply, known as M2, rose 0.59 percent annually in April to $20.8 trillion, after contracting as much as 4.5 percent a year ago, the Federal Reserve said Tuesday.

The program of dramatic quantitative easing in response to the pandemic – consisting of cutting interest rates to zero and boosting the money supply – likely prevented a major depression when the pandemic shut down the economy. Massive amounts of stimulus from both the Trump and Biden administrations also played a major role in staving off that downturn.

But all that extra money in the system allowed companies to raise prices, fueling a rise in inflation that has yet to be licked despite a subsequent program of quantitative tightening by the Fed.

“The increase in the [money supply] Stock prices were so high that excess liquidity and savings are likely still seeping into the system,” Deutsche Bank researcher Jim Reid wrote in a commentary on Wednesday.

The money supply began to decline in April 2022, at the same time the Fed began raising interest rates.

But the M2 has been rising again since October, despite a rebound due to bank failures that prompted the Fed to extend an additional credit line to the financial sector. Inflation will remain around 3 percent as long as the money supply increases.

The trend is still above pre-pandemic trends but will likely normalize around the end of the year, analysts predict.

“What happens next is a big open question,” Reid wrote. “To maintain economic growth at current levels, the money supply will probably have to grow faster again soon. The main ways this could happen is through an easing of Fed policy (interest rates or balance sheet activity), through banks lending more, or through looser fiscal policy.”

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