The Evolution of M2 as a Monetary Aggregate Measure
An analysis of the Federal Reserve's M2 monetary aggregate measure, its components, and recent changes.
Source: FRED Blog
The Federal Reserve's monetary aggregates provide a comprehensive view of the money supply in the economy. Among these measures, M2 is particularly significant as it captures the liquidity of money available for immediate use. This article delves into the intricacies of M2, its components, and recent adjustments made to this monetary aggregate.
Key Facts
M2 is a broad measure of money that includes cash, checking deposits, and certain types of easily convertible assets. It excludes non-liquid assets such as individual retirement accounts (IRAs) and Keogh accounts, which are penalized for early withdrawals. As of June 2026, M2 stood at $23 trillion.
The composition of M2 includes:
- M1: Cash and checking/savings accounts, represented in blue on the FRED graph.
- Small-denomination time deposits: Represented in green.
- Retail money market funds: Represented in brown.
- IRA and Keogh balances: Represented in purple and subtracted from the total M2 value.
Recent changes have seen a shift in how IRA and Keogh balances are accounted for in M2. As of July 28, 2026, these balances are now subtracted from the total M2 rather than from the individual values of small-denomination time deposits and retail money market funds. This adjustment has resulted in a minimal impact on the total M2 value but has altered the recalculation of these components.
Analysis
The inclusion of IRA and Keogh balances in M2 was previously based on the assumption that these funds were less liquid. However, recent surveys indicate that a growing portion of these balances is being held in savings and checking-type accounts, making them more liquid than previously thought. This shift has prompted the Federal Reserve to adjust the calculation of M2, reflecting a more accurate measure of the money supply.
The adjustment to M2 is significant as it affects the Federal Reserve's understanding of the economy's liquidity and its policy decisions. By providing a more precise measure of money availability, the Federal Reserve can better assess the need for monetary policy adjustments to control inflation or stimulate economic growth.
Implications
The changes to M2 have implications for both markets and investors. Investors may need to adjust their assessments of the money supply and liquidity conditions in the economy, as the revised M2 figure may provide a different perspective on the overall liquidity landscape. For markets, the shift in M2 composition may influence interest rate decisions and other monetary policy actions, as the Federal Reserve considers the revised data in its decision-making process.
The Federal Reserve's continued refinement of monetary aggregates like M2 reflects the evolving nature of the financial system and the need for accurate and relevant economic indicators. As the economy adapts to new financial products and services, so too must the measures used to assess it.
By understanding the nuances of M2 and its components, economists, investors, and policymakers can better navigate the complex monetary landscape and make informed decisions that impact the overall health of the economy.