US could avoid a recession due to shrinking M2, says Fed official James Bullard

A sharp decline in the M2 measure of the US money supply would be good news for policymakers in their efforts to control high inflation, St. Louis Fed President James Bullard said.

“M2 exploded during the pandemic and correctly predicted that we would get inflation and now if you look at the same chart M2 growth has decreased significantly,” he told an audience in St. Louis on Thursday. “That’s good for disinflation but it’s actually turned negative in recent readings.”

M2, which measures cash in circulation more dollars in bank accounts and in the money market, increased by more than 40% during the pandemic as the central bank flooded the financial markets with emergency liquidity.

It peaked at $21.7 trillion in March 2022 and has since declined to $21.4 trillion in November. If the decline continues, it would mark the first annual decline since records began in the 1950s.

The St. Louis Fed has a long history of championing the study of monetary aggregates for insights into inflation. Bullard called himself a “monetarist at heart,” while acknowledging why the practice fell out of favor with central bankers.

“It’s just difficult to correlate the high frequency of inflation numbers. I think that’s the main issue,” he said. “But inflation is a monetary phenomenon. That is called monetary policy.

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