Over the past year, growth in the M2 measure of money supply in the United States1 has slowed from 27.1% year-on-year in February 2021 to 9.5% year-on-year in March 2022. This mainly explained by the moderation in purchases, by the Federal Reserve (Fed) and banks, of Treasury bills (blue bars) and mortgage-backed securities (MBS, hatched green bars). As the Fed ended its net purchases at the end of February 2022, the effect of QE was even weaker in Q1 2022. Since Q2 2021, the Fed’s repo agreements with money market funds (light gray bars) have also led to the (temporary) destruction of money2. Other factors worked in the opposite direction. The reduction in Treasury holdings with the Fed (hatched blue bars), which funded economic support programs, served to increase deposits with commercial banks. Depressed by a significant comparison effect in 2021 (97% of outstanding guaranteed corporate loans issued in 2020 were canceled in 2021), bank credit (green bars), the traditional driver of money creation, came back to life in the first quarter 2022.
The normalization of US monetary policy should prolong this slowdown. On the one hand, the rise in key interest rates could temporarily increase the attractiveness of the Fed’s reverse repo facility and term deposits3 for bank customers. At the same time, the rapid tightening of monetary policy could weaken the credit channel. On the other hand, starting June 1, the Fed will stop fully reinvesting all maturing debt in its securities portfolio. Some non-bank entities will acquire newly issued Treasury bills and MBS, thereby reducing their deposits.
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