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The M2 money supply, which serves as a comprehensive measure of the money available in an economy, approached a record level in December, reaching $21.5 trillion. This measure includes both readily available funds and assets that can be quickly converted into cash.
The significance of the M2 money supply lies in its correlation with the Consumer Price Index (CPI), a gauge of inflation that reflects the average price change over time for goods and services. An increase in the M2 money supply can signal potential inflationary trends by indicating more money is flowing into the economy.
The rise in the M2 money supply has been consistent, marking new monthly highs since January 2024. This trend suggests an ongoing influx of liquidity into the financial system, which often benefits risk assets initially as they tend to absorb new liquidity more quickly.
This excess liquidity tends to reduce the purchasing power of fiat currencies, making inflation-hedging assets like Bitcoin and other cryptocurrencies more attractive.
Despite the Federal Reserve’s efforts to control inflation through quantitative tightening and maintaining higher federal funds rates, the M2 money supply’s growth persists. The Fed’s actions are part of a broader strategy to rein in CPI growth and achieve its 2% inflation target.
The continued expansion of the M2 money supply amidst the Federal Reserve’s tightening measures presents a complex backdrop for economic indicators and asset prices moving forward.
Source: CoinDesk
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