Line chart showing the percent year-over-year change in Federal Reserve assets and the U.S. budget deficit in terms of percent of nominal GDP from January 2006 to December 2023. Budget deficit data as of November 2023. The budget deficit has risen since mid-2022 but remains below 2021 highs. The Federal Reserve balance sheet growth has slowed significantly from the heightened pandemic levels.
Line chart showing the year-over-year change in the M2 money supply and the M2 money supply as a percent of GDP from January 2014 to November 2023. Both measures had a sharp rise during the pandemic. While money supply growth has plummeted below 2020 levels, the money supply as a percent of GDP has declined more slowly and remains elevated.
Sources:
Top chart: Bloomberg, U.S. Treasury Department, Federal Reserve Board, and Wells Fargo Investment Institute. Monthly data from January 1, 2006 to December 31, 2023. Budget deficit: monthly data from January 1, 2006 to November 30, 2023. Bottom chart: Bloomberg, Federal Reserve Board, and Wells Fargo Investment Institute. Monthly data from January 1, 2014 to November 30, 2023. M2 money supply = currency, demand, and small-time deposits. Fed = Federal Reserve. GDP = Gross Domestic Product.
Key Takeaways
- Added pressure on market liquidity is set to come from a wind down of the Fed’s liquidity facility and from its policy of quantitative tightening (QT) that has reduced the size of its balance sheet and of the money supply in the past year.
- Still-sizable money supply is combining with a recent increase in money velocity — the speed with which money circulates in financing transactions — to leave the economy exposed to inflation even as funds are drained from the financial market.