what are monetary aggregates 
monetary aggregates are the various measurements of the money supply in an economy in the united states they are used to evaluate the economic health and stability of the nation in addition the federal reserve uses them to implement its monetary policy in the u s the monetary aggregates are labeled as a legacy aggregate known as m3 which is all of m2 plus large time deposits over 100 000 and institutional money market funds repo agreements and large liquid assets has not been tracked by the federal reserve since 2006 but is still calculated by some analysts understanding monetary aggregatesthe monetary base or m0 is a monetary aggregate that is not widely observed and differs from the money supply but is nonetheless very important it includes the total supply of currency in circulation in addition to the stored portion of commercial bank reserves within the central bank this is sometimes known as high powered money hpm since it can be multiplied through the process of fractional reserve banking m1 is a narrow measure of the money supply that includes physical currency demand deposits traveler s checks and other checkable deposits m2 is a calculation of the money supply that includes all elements of m1 as well as near money near money refers to savings deposits money market securities mutual funds and other time deposits these assets are less liquid than m1 and not as suitable as exchange mediums but they can be converted into cash or checking deposits quickly 1the federal reserve fed uses monetary aggregates as a metric for how open market operations such as trading in treasury securities or changing the discount rate affect the economy investors and economists observe the aggregates closely to try to predict actions that the fed might take they also watch them because they offer a more accurate depiction of the actual size of a country s working money supply by reviewing weekly reports of m1 and m2 data investors can measure the monetary aggregates rate of change and monetary velocity overall that knowledge may provide an idea of whether the fed might raise or lower interest rates the size of the u s monetary base as of may 2024 2the impact of monetary aggregatesstudying monetary aggregates can generate substantial information on the financial stability and overall health of a country for example monetary aggregates that grow too rapidly may raise concern for an increase in inflation if there is a greater amount of money in circulation than what is needed to pay for the same amount of goods and services prices are likely to rise if inflation increases substantially central banking groups may be forced to raise interest rates or stop the growth in the money supply for decades monetary aggregates were essential for understanding a nation s economy and were key in establishing central banking policies in general the past few decades have revealed that there is less of a connection between fluctuations in the money supply and significant metrics such as inflation gross domestic product gdp and unemployment the amount of money that the fed releases into the economy is a clear indicator of the central bank s monetary policy when compared with gdp growth m2 is still a useful indicator of potential inflation the m2 money supply contracted 4 1 from 21 7 trillion in july 2022 to 20 8 trillion in may 2023 in february 2024 it had dropped further to 20 75 trillion 23examplesince 2022 the u s money supply has experienced a reduction greater than any seen since world war ii 4reductions in the money supply aren t common when they occur they can be a sign of problems to come related to economic growth employment and inflation in fact an m2 that isn t growing could presage a recession a growth in unemployment and deflation however gdp growth in the fourth quarter of 2023 increased by 3 2 a figure that surpassed expectations 5 this was seen as good news for the economy by the biden administration 6