M1 and M2 (Money Supply)
The two main measures of the US money supply, capturing different degrees of liquidity from narrow (M1) to broad (M2).
What is M1 and M2?
M1 and M2 are the Federal Reserve's primary classifications of the US money supply, measuring money's availability across increasing levels of liquidity. M1—the narrowest measure—comprises physical currency in circulation, demand deposits at commercial banks, and other deposits that are immediately accessible; following a 2020 redefinition by the Fed, M1 also includes savings deposits. M2 encompasses all of M1 plus small-denomination time deposits (certificates of deposit under $100,000) and retail money market mutual fund shares. M2 is the more widely monitored aggregate for monetary policy purposes. The Federal Reserve publishes M1 and M2 data weekly. While Milton Friedman's monetarist framework held that M2 growth reliably predicted inflation, this relationship has become less stable since the 1980s as financial innovation altered the velocity of money.
Example
Between February 2020 and April 2022, US M2 money supply expanded by approximately $6.3 trillion—a 38% increase in just two years—driven by Federal Reserve quantitative easing and pandemic-era fiscal stimulus deposited into bank accounts. This rapid M2 growth, combined with supply chain disruptions, contributed significantly to the 2021–2022 inflation surge. When the Fed reversed course with quantitative tightening in 2022, M2 contracted for the first time in decades—falling by approximately $900 billion through 2023—as the money created during the pandemic was slowly withdrawn from the financial system.