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 March 2024. Budget deficit data as of February 2024. 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 February 2024. 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 March 31, 2024. Budget deficit: monthly data from January 1, 2006, to February 29, 2024.
Bottom chart: Sources: Bloomberg, Federal Reserve Board, and Wells Fargo Investment Institute. Monthly data from January 1, 2014, to February 29, 2024. M2 money supply = currency, demand, and small-time deposits. Fed = Federal Reserve. GDP = Gross Domestic Product.
Key Takeaways
- Added pressure on market liquidity from a wind down of the Fed’s liquidity facility and from its policy of quantitative tightening (QT) is set to ease later this year, as the Fed “tapers” its securities sales to the market. QT has reduced the size of the Fed’s balance sheet and has helped restrain money growth 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.