US M2 ended the longest continuous decline in over 60 years, with a MoM increase of 0.6% in May.

The seasonally adjusted data released by the Federal Reserve on Tuesday showed that the key indicator of US money supply, M2, increased by 0.6% in May compared to April, reaching $20.8 trillion. According to Bloomberg, this is the first monthly growth since July last year and ends the longest decline since at least 1959.

During the COVID-19 pandemic, the Federal Reserve injected a huge amount of liquidity into the market, causing M2 supply to reach a nearly 27% YoY growth rate record in February 2021. Subsequently, the skyrocketing inflation rates in the US and other regions have led to market attention to the monetary supply indicators. The Fed's policymakers have not used the monetary supply indicators as the main indicators for a long time.

M2 in the US fell by about 4% YoY in March and April this year, accelerating from a 2.2% decline in February. The continuous decline of M2 since the second half of last year, combined with the Fed's aggressive monetary tightening actions, has raised concerns among some economists. They believe that the US economy has the conditions for deflation. In theory, a smaller amount of money in the system means less economic activity and lower inflation.

Earlier this year, Brad, a hawkish official of the Federal Reserve, pointed out: "M2 surged during the COVID-19 pandemic and correctly predicted the subsequent inflation, but the recent YoY decline in M2 may indicate deflation."

Currently, in the US, M2 = M1 (cash in circulation + demand deposits + other liquid deposits) + small time deposits (less than $100,000) + retail money market funds, excluding large (i.e., over $100,000) corporate time deposits and institutional money market funds. Huatai Securities once pointed out that the concept of M2 in the US is closer to the concept of M1 in China, which means higher liquidity of "cash + demand/ small time deposits".

Wall Street News previously analyzed that the continuous reduction of the Fed's balance sheet, the decline in bank deposits caused by the US banking crisis, and the credit tightening have led to the largest YoY decline in M2 money supply in March in history.

The rapid contraction of the US money supply earlier this year once caused market concerns. Some market participants pointed out that such a sharp decline in money supply had never been seen since the Great Depression. According to the quantity theory of money, economic activity will decline 6-18 months after M2 declines.

However, Fed Chairman Powell does not believe that the money supply will affect the economy. He stated in the semi-annual monetary policy report submitted to the US Congress in 2021: "When we studied economics many years ago, M2 and the total money supply seemed to be related to economic growth, but now M2 does not have any substantive meaning. I think this is something we must forget."