What is the money supply, and how does it relate to inflation?
How much money is there? The Federal Reserve keeps track.
Grab your wallet – have any cash? Do you have a debit card? Are there coins loose in your sofa cushion? It’s all part of the national money supply.
What is the money supply?
The amount of money in the economy at any given time is called the “money supply” and it’s one of many metrics the Fed uses to monitor the economy — because of how it helps us understand inflation.
Policymakers scrutinize the money supply to see what’s driving inflation so they can figure out how to mitigate it, an economic goal with no party lines.
Broadly, the money supply is the total amount of money circulating through the economy. Specifically, the Federal Reserve defines it as the group of safe assets that households and businesses can use to make payments or hold as short-term investments, which includes both physical cash and money in accounts that are easily accessed.
Economists commonly use two measures of money supply, M1 and M2.
- M1 includes physical currency in circulation along with checking, savings, retirement, and similar accounts.
- M2 is a broader measure that adds funds held in small-denomination time deposits (like certificates of deposit or CDs) and retail money market mutual fund shares.
The main distinction between M1 and M2 is how easy it is to access these assets; M2 assets can be converted into cash, but it takes a bit more effort to access them than M1 assets.
There was $22.7 trillion in circulation in March 2026.
Seasonally-adjusted M2 money stock, 1959–2026
How does the money supply relate to inflation?
The basic idea is straightforward: if the amount of money in circulation grows faster than the amount of goods and services being produced, each dollar effectively buys less, and prices rise. Economists call this “demand-pull inflation.” Non-economists might describe it as "too much money chasing too few goods."
Here’s what this looks like: during the COVID-19 pandemic, the Fed expanded the money supply to keep credit flowing and the economy stable. M2 grew by 19% from 2019 to 2020 and another 16% in 2021. (From 2000 to 2019, M2 grew an average of 6% per year.) But at the same time, supply chains broke down, limiting the availability of goods. More money and fewer things to buy drove an inflation spike.
The Federal Reserve expanded the money supply during COVID-19.
Annual change in M2 money stock, 1960–2025
The relationship between money supply and inflation isn't always so direct; the pandemic was unusual because the rapid money growth was simultaneous with the most severe supply shortages. The Federal Reserve doesn’t actually use money supply as a primary metric — it's one data point among many.
How do the Federal Reserve and inflation impact the money supply?
The Federal Reserve tries to manage inflation by raising or lowering its target range for the federal funds rate, the interest rate banks charge each other for short-term loans.
When the Fed lowers the rate, borrowing becomes less expensive for banks and consumers. Things like car loans and mortgages become more affordable, and this can fuel spending and investment. This approach has been used in times of economic uncertainty, like during the COVID-19 pandemic.
The Fed can also raise the target range when inflation is too high, as in 2022. Borrowing becomes more expensive for everyone, which can slow spending and investment. When loans are more expensive, fewer people take loans and less new money gets added to the banking system — the money supply slows, spending and investment slow, and inflation cools. The Fed can also sell some of the government bonds it holds to pull more money out of circulation, a process known as quantitative tightening.
Where does the data come from?
Data on the money supply is collected by the Federal Reserve Bank of St. Louis, one of the 12 regional federal banks, which manages the FRED (Federal Reserve Economic Data) database. Money supply data is available dating back to 1959 and updates monthly.
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