U.S. M2 Money Supply Hits Record High of Nearly $22T
The M2 money supply in the U.S., a comprehensive measure encompassing hard currency and readily liquid bank deposits, reached a record high of $21.94 trillion in May 2024, surpassing the previous peak of $21.72 trillion in March 2022 (barchart.com). This represents a year-on-year growth rate of 4.5%, the highest in almost three years, mirroring April’s figure (Yahoo Finance). The implications for Bitcoin (BTC) are complex and somewhat contradictory.
Traditionally, a rising M2 signals looser financial conditions and economic expansion, potentially encouraging investors to embrace riskier assets like cryptocurrencies. However, this increased money supply can fuel inflation if it outpaces economic growth (TIOmarkets). Inflationary pressures might deter investors from riskier ventures, prompting the Federal Reserve to raise interest rates.
Historically, the correlation between M2 growth and inflation, as measured by the Personal Consumption Expenditures (PCE) index, exhibits a lag. The St. Louis Federal Reserve’s blog highlights that PCE inflation began its ascent in February 2021, a year after the surge in M2 growth commenced in February 2020. Conversely, the PCE followed the decline in M2 growth in 2023.
This historical precedent suggests that the current upward trend in M2 could contribute to inflation in the coming months. This scenario would complicate the Federal Reserve’s potential plans to lower interest rates to 1%, a target recently advocated by former President Donald Trump. The interplay between M2 growth, inflation expectations, and Federal Reserve policy creates uncertainty regarding the future trajectory of Bitcoin’s price. While a growing money supply can be bullish for risk assets, the potential inflationary consequences and subsequent interest rate hikes present significant headwinds. The market’s reaction will depend on how these competing forces play out. The lag effect observed historically adds another layer of complexity, making precise predictions challenging.
