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 June 2024. Budget deficit data as of May 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 May 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 June 30, 2024. Budget deficit: monthly data from January 1, 2006, to May 31, 2024.
Bottom chart: Sources: Bloomberg, Federal Reserve Board, and Wells Fargo Investment Institute. Monthly data from January 1, 2014, to May 31, 2024. M2 money supply = currency, demand, and small-time deposits. Fed = Federal Reserve. GDP = Gross Domestic Product.
Key Takeaways
- Added pressure on market funds from a wind down of the Fed’s liquidity facility and from its policy of quantitative tightening (QT) is easing, as the Fed “tapers” its securities sales to the market. QT had reduced the size of the Fed’s balance sheet and helped restrain money growth in the past year.
- A shrinking money supply is countering a recent increase in money velocity — the speed with which money circulates in financing transactions — to leave the economy exposed to a pullback in liquidity even as the Fed eases the reins on QT.