The M2 Money Supply has continued to grow with potential upside for Bitcoin and risk assets.
The US economy has witnessed another major financial shift, as showcased by the M2 Money Supply. According to CoinDesk, the M2 money supply climbed to $21.5 trillion in late December, approaching its all-time high (ATH).
This continuous expansion of money in circulation plays a crucial role in shaping inflation trends, market movements, and Federal Reserve policies. Despite the Fed’s ongoing efforts to tighten monetary conditions, the relentless growth in M2 suggests that liquidity is still pouring into the system.
Understanding M2 Money Supply and Its Role in the Economy
As Coinspeaker explains, the M2 money supply is a broad measure of the total money circulating in the economy. It includes highly liquid assets like cash and checking deposits.
As well as less liquid assets such as savings accounts and money market funds. Since January 2024, the M2 money supply has set a new monthly high. This persistent increase signals that liquidity is flowing into the economy. When M2 increases, money is available for spending and investing in the economy. A rising M2 money supply is a bullish indicator for risk assets like stocks and cryptocurrencies. Historically, this can fuel inflation and impact financial markets.
Last November, Coinspeaker reported that Bitcoin BTC $92 637 24h volatility: 2.3% Market cap: $1.85 T Vol. 24h: $52.38 B might face a big hurdle in reaching new highs. Analysts predicted a possible 20% drop or more. This is because Bitcoin’s price moves closely with the global M2 money supply. If M2 slows down, Bitcoin could also decline. For now, the top coin was trading for $102,128.03, down 0.36% in 24 hours.
Meanwhile, this increased growth comes despite the Federal Reserve’s efforts to tighten financial conditions. Notably, the Consumer Price Index (CPI), which tracks the rising cost of goods and services, also reflects how inflation trends change.
This is because M2’s growth has a direct influence on the CPI. When more money enters the system, it often leads to higher prices of goods and services, making it harder for the Federal Reserve to control inflation.
M2 Grows Amidst Federal Reserve Effort to Stabilize the Economy
The Federal Reserve has been trying to curb inflation by maintaining high interest rates and reducing its balance sheet through quantitative tightening.
The goal is to return CPI inflation to its annual 2% target. However, the continued expansion of M2 suggests that these efforts have not significantly slowed liquidity growth.
Nevertheless, the rising M2 money supply favors risk assets such as stocks, real estate, and digital assets. This is because excess money often flows into these market classes first before affecting the broader economy.
If M2 keeps climbing, markets may continue to see upward momentum. However, more money in circulation can push prices higher, making inflation harder to control. If this trend continues, it could further raise doubts about the Fed’s strategy and lead to more aggressive rate hikes or prolonged tight monetary conditions.
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