Less Money As Money Supply Shrinks. What Does It Mean For The World’s Inflation?

Jan 25, 2023

Less Money As Money Supply Shrinks

In the next few weeks, the Federal Reserve will make a critical decision. Markets expect the central bank to raise interest rates by a quarter of a percentage point, signaling a significant slowdown in record growth.

If that happens, a change in direction would be warranted, as higher rates seem to be working. The annual inflation rate fell for the sixth straight month in December, and it appears to be slowing further.

Another indication that the Fed's rate rises are having an effect: In December, the amount of money in the economy decreased. The growth of M2, a measure of the economy's money supply that comprises currency in circulation, balances in retail money-market funds, and savings deposits, among other things, has declined during the previous two years following a jump in 2020, but December figures show a decrease.

The December money supply growth rate was minus 1.3% as compared to a year earlier, the lowest ever and the first-ever decrease in M2 based on all available data. In 1959, the Fed began measuring the statistic. The rate of increase in November was already 0.01%, significantly below the record of 27% in February 2021.

https://liquidity-provider.com/app/uploads/2023/01/snimok-ekrana-2023-01-25-v-18.13.02.png

This drop indicates a weakening economy and a significant impact of rising interest rates, which supports current recession forecasts. However, the statistics do not indicate a significant economic slowdown. Despite one of the strongest slowdowns, M2 is still 37% higher than before the epidemic. In other words, analysts believe that the amount of liquidity in the system remains large, indicating that more needs to be done to normalize the economy.

That isn't the only reason M2 rose — and has now fallen precipitously. We can look at the Fed's balance sheet operations to help us with this.

During the epidemic, the Fed's "quantitative easing," or bond purchasing, boosted the economy and the central bank's balance sheet to about $9 trillion.The Fed is decreasing liquidity by reducing its total assets through quantitative tightening.

The Fed's total assets were down 5.3% on January 18 compared to last year's peak, but the balance sheet is still more than twice what it was in February 2020 before the epidemic began. That's a lot of money, but the Fed doesn't want to risk upsetting financial markets by tightening further.

The Fed “does not want to convert monetary tightening into an episode of financial instability,” said Acharya, who along with three other economists published a paper in August titled Why Shrinking Central Bank Balance Sheets is an Uphill Task.

Finally, when M2 falls more, it should assist in tempering inflation by crimping demand and lowering the capacity to support bank loans and other financing for families, enterprises, and financial market transactions, according to Nathan Sheets, Citi's global chief economist.

However, investors should not assume that falling M2 always indicates an economic downturn, notes Richard Farr of Merion Capital Group. M2 has to decline by at least another trillion dollars to be meaningful, according to him.

Well, that's still quite a ways away.

Subscribe Our Newsletter

Advanced Markets Reports Stronger Revenue And Mitigated Loss
Advanced Markets UK Reports Stronger Revenue And Mitigated Loss For 2020‎

Advanced Markets (UK) Limited, the UK trading arm of a multi-asset liquidity and prime-of-prime service provider, has released its annual report and year-end financial statements for the 12-month period ending December 31, 2020.

Stocks
As Germany's Business Confidence Deteriorates, The Euro Slides to July 2020 Lows
As Germany’s Business Confidence Deteriorates, The Euro Slides to July 2020 Lows

The euro sank on Wednesday as a poll revealed that German business confidence declined in November, while the Turkish currency stayed under pressure as President Tayyip Erdogan supported interest rate cuts despite rising inflation.

Forex
B2BROKER Liquidity B2BROKER Liquidity
Sponsored
Alexander

Liquidity Provider vs Market Maker in 2024: What Is the Difference?
In this article, we'll delve into the concept of a liquidity provider vs. market maker, their functions, and how they impact traders' experiences and the market as a whole.

discover
Best Technical Analysis Indicators.

Tamta

Best Technical Analysis Indicators

Throughout history, people have always looked for ways to make money, and trading has become a popular choice today. But successful trading isn't about luck or guesswork - it requires careful analysis to make the right decisions.

Trading
Contact us bg

Contact Us

Contact the Liquidity Provider
for any questions and advertising inquiriesb2broker

    Please fill out this contact form to get in touch with us

    / 3000

    By clicking “Get in touch” button, you agree to the privacy policy

    Successful!
    Thank you for your request.
    We will contact you shortly.
    Close

    Hazem

    MetaTrader vs cTrader: Which Trading Platform Shall You Choose?

    MetaTrader vs cTrader: The Full Breakdown

    Сonstantine

    Will Dogecoin Reach $1? Tokenomics and Price Analysis

    Will Dogecoin Reach 1 Dollar Analysis

    Сonstantine

    How to Get a Crypto Exchange License?

    How to Get Crypto Exchange License

    Сonstantine

    Best Crypto to Buy Now: Guide for Investors

    Best Crypto To Buy Now

    Hazem

    Grok vs ChatGPT: What’s the Best AI Assistant You Need in 2025

    Grok vs ChatGPT

    Сonstantine

    How to Choose the Right Liquidity Provider for Your Brokerage

    How to Choose the Right Liquidity Provider for Your Brokerage

    Сonstantine

    Low-Latency Trading Defined: Speed, Strategy and Technology

    Low-Latency Trading Explained

    Hazem

    How Liquidity Depth Affects Slippage in High-Volume Trading

    Liquidity depth and slippage in trading

    Hazem

    What is FIX API Liquidity Connection and How Does it Power Institutional Trading?

    FIX API in institutional trading

    Сonstantine

    OTC Trading Strategies and Technologies to Succeed in Over-the-Counter Markets

    OTC Trading Strategies

    Alexander

    What is OTC Trading? A Complete Guide for 2025

    what is OTC

    Alexander

    Synthetic Futures: A Trader’s Guide to Replicating Positions with Options

    How to Trade Synthetic Futures

    Сonstantine

    Order Book Depth: What It Is And Why It Matters?

    Order Book Depth What It is And Why It Matters

    Alexander

    Spot vs Perpetual Futures: Which Is Right for You?

    Spot vs Perpetual Futures explained

    Hazem

    5 Reasons Traders Are Switching to Perpetual Futures

    5 Reasons to Switch to Perpetual Futures

    Constantine

    Top 3 Liquidity Challenges Facing New Exchanges and How to Solve Them

    Top 3 Liquidity Challenges Facing New Exchanges Today

    Constantine

    Financial Planning in the Cryptocurrency Era — Master Crypto and Digital Asset Strategies

    Financial Planning in the Cryptocurrency Era

    Hazem

    Best Platforms to Trade Perpetual Futures in 2025

    Best platforms to trade perpetual futures in 2025

    Alex

    Top 10 Fintech Website Development Agencies for 2025

    Best Fintech Website Development Agencies for 2025

    Сonstantine

    Internal vs External Range Liquidity In ICT Trading Explained

    Internal vs External Range Liquidity In ICT Trading

    Constantine

    Portfolio Backtesting — Tools, Metrics, and Methods Explained

    Portfolio Backtesting

    Сonstantine

    ICT Trading Explained: Smart Money Concepts, Tools and Setups

    ICT Trading Explained

    Сonstantine

    CFD Trading Strategies: A Practical Guide to Risk and Execution

    CFD Trading Strategies

    Alexander

    What is a Fair Value Gap? A Guide to Trading Market Imbalances

    What is Fair Value Gap
    liquidity-provider-logo
    • News
      • Stock Market Forecast
      • Stocks
      • Banks and Finance
      • Companies
      • Crypto
      • Forex
      • AI
      • Technology
      • DeFi
      • NFT
    • Articles
      • Crypto Payments
      • Trading
      • Crypto Exchange Business
      • Forex Business
      • Fintech
      • Liquidity
      • FinTech Awards
      • Blockchain
      • Investing
      • NFT
      • DeFi
    • More
      • Videos
      • Liquidity Providers List
      • Crypto Payment Providers
      • White Label Brokerage Platforms
      • Broker CRM Platforms
    [email protected]

    © 2024 Liquidity Provider. All Rights Reserved

    Privacy Policy Cookie Policy
    This site is registered on wpml.org as a development site. Switch to a production site key to remove this banner.