- The U.S. money supply has shifted from historic contractions in 2023 and early 2024 to accelerated growth, reaching a 27-month high in November 2024, with year-over-year growth hitting 2.35%. This marks a sharp turnaround from the 8.5% decline seen in November 2023.
- The Fed’s accommodative stance, including multiple interest rate cuts in late 2024, has driven money supply growth. This shift prioritizes economic stimulus over inflation control, despite CPI inflation remaining above the Fed’s 2% target.
- Persistent inflation (CPI at 2.7% and core CPI at 3.3%) and a projected $3 trillion federal deficit for 2025 have raised concerns. The Fed’s policies aim to manage debt sustainability but risk fueling long-term inflationary pressures.
- Bond yields, such as the 10-year Treasury reaching 4.73% and the 20-year Treasury surpassing 5%, reflect investor fears of inflation and fiscal instability, signaling doubts about the Fed’s approach.
- The U.S. economy faces ongoing challenges from fiscal and monetary expansion, with money supply up 192% since 2009. Critics warn that the Fed’s reliance on easy money may lead to sustained inflation and financial instability, with significant implications for taxpayers and economic stability.
The U.S. money supply has entered a new phase of accelerated growth, reaching a 27-month high in November 2024, according to data from the Mises Institute. This marks a significant reversal from the historic contractions seen throughout much of 2023 and early 2024, when the money supply experienced its steepest decline since the Great Depression. The recent uptick in money supply growth, coupled with the Federal Reserve’s dovish policy shift, has reignited concerns about inflation and the long-term stability of the U.S. economy.
A historic reversal in money supply trends
Year-over-year growth in the money supply reached 2.35% in November, the highest level since September 2022. This represents a sharp turnaround from November 2023, when the money supply shrank by 8.5% year over year. The current growth trend, which began in July 2024, has seen the money supply increase month over month for five consecutive months, with November’s 0.95% rise marking the third-largest monthly increase since March 2022.
The metric used to track these changes – the Rothbard-Salerno money supply measure (TMS) – was developed by economists Murray Rothbard and Joseph Salerno to provide a more accurate gauge of money supply fluctuations than the commonly cited M2 measure. While M2 has also shown growth, it has outpaced TMS, with M2 increasing by 3.73% year over year in November, up from 3.13% in October.
This resurgence in money supply growth follows a period of unprecedented contraction, during which the money supply fell by more than at any point in the past six decades. The reversal suggests that the Federal Reserve’s recent policy decisions, including multiple interest rate cuts, are beginning to take effect.
The Fed’s dovish pivot and its implications
The Federal Reserve’s shift toward a more accommodative monetary policy has been a key driver of the recent money supply growth. In September 2024, the Federal Open Market Committee (FOMC) cut the target policy interest rate by 50 basis points — a move typically reserved for periods of economic uncertainty or impending recession. The Fed followed this with additional rate cuts in November and December, signaling its willingness to prioritize economic stimulus over inflation control.
This dovish stance has raised eyebrows among economists, particularly given the persistent inflationary pressures in the economy. The Consumer Price Index (CPI) rose 2.7% year over year in November, while core CPI remained flat at 3.3%. These figures are well above the Fed’s 2% inflation target, suggesting that the central bank is prioritizing other economic concerns, such as managing the federal debt, over reining in inflation.
The Fed’s actions also reflect the growing influence of fiscal policy on monetary decisions. With the U.S. Treasury facing a projected $3 trillion deficit for fiscal year 2025, the federal government relies on low interest rates to manage its $36 trillion debt burden. By cutting rates, the Fed has created more room for open market operations, allowing it to purchase excess government debt and keep Treasury yields in check.
Bond markets signal inflationary fears
Despite the Fed’s efforts to suppress interest rates, bond markets have shown signs of skepticism. In early January 2025, the yield on the 10-year Treasury surged to 4.73%, the highest level since April 2024. Similarly, the 20-year Treasury yield topped 5% for the first time since 2023, reflecting investor concerns about inflation and the sustainability of federal deficits.
“The US market is having an outsized effect as investors grapple with sticky inflation, robust growth, and the hyper-uncertainty of incoming President Trump’s agenda,” said James Athey, a portfolio manager at Marlborough Investment Management.
The bond market’s reaction underscores a broader unease about the long-term consequences of the Fed’s policies. With the money supply up 192% since 2009 and nearly 26% of the current $19.3 trillion money supply created since January 2020, many investors fear that the Fed’s continued reliance on easy money will fuel further inflation.
A new era of fiscal and monetary challenges
The current acceleration in money supply growth is not occurring in isolation. It is part of a broader trend of fiscal and monetary expansion that has defined the U.S. economy since the 2008 financial crisis. Since 2009, the TMS money supply has grown by more than 192%, while M2 has increased by 150%. This expansion has been driven by a combination of quantitative easing, pandemic-era stimulus, and persistent federal deficits.
The Fed’s recent actions suggest that it is unlikely to reverse this trend anytime soon. Instead, the central bank appears to be doubling down on its commitment to low interest rates and easy money, even as inflationary pressures persist. This approach has drawn criticism from those who argue that the Fed is prioritizing short-term economic stability over long-term fiscal responsibility.
As the U.S. economy enters 2025, the interplay between monetary policy, fiscal policy, and inflation will remain a critical issue. The Fed’s dovish pivot and the resurgence in money supply growth may provide a temporary boost to economic activity, but they also raise the risk of sustained inflation and financial instability. For now, the bond market’s reaction serves as a stark reminder of the challenges ahead.
In the words of Lilian Chovin, head of asset allocation at Coutts, “Treasury yields at 5% is definitely on the cards. There’s a risk premium, a term premium going on with the very large fiscal deficits.” As the Fed continues to navigate these turbulent waters, the stakes for the U.S. economy – and for American taxpayers – could not be higher.
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