• Decline in Federal Reserve’s balance sheet offset by rising M2 money supply, impacting inflation control
• Rising M2 money supply coincides with growth in assets like Bitcoin and S&P 500 since October 2023
• Persistent inflationary pressures indicated by Personal Consumption Expenditures (PCE) Price Index data, posing challenges for economic policy aimed at price stability
Recent data from the St. Louis Federal Reserve shows interesting trends in the Fed’s balance sheet and M2 money supply that could benefit Bitcoin.
The Federal Reserve’s Balance Sheet
The Fed’s balance sheet has been gradually declining due to quantitative tightening. It currently stands at $7.3 trillion, down from a peak of $9 trillion in April 2022. However, it remains considerably higher than the pre-COVID level of $4.1 trillion, indicating over $3 trillion left to be trimmed.
M2 Money Supply
M2 money supply, which includes easily convertible money, reached a peak of $21.7 trillion in 2022. It hit a low of $20.7 trillion in October 2023 but has since begun rising again, currently at $20.9 trillion.
For the first time since November 2022, the year-over-year percentage change in M2 has turned positive. This signals potential tailwinds for risk assets.
Market Reaction
Coinciding with the M2 increase, assets like Bitcoin and the S&P 500 have shown significant growth since October 2023. Bitcoin surged from $25,000 to over $70,000. The S&P 500 climbed from 4,100 to 5,244 after bottoming out in October.
Inflation Concerns
However, the growing money supply complicates efforts to curb inflation. The PCE Price Index and Core PCE were both reported at 2.7% and 2.8% respectively, reflecting persistent inflationary pressure. This poses difficulties for policies aimed at price stability.
Conclusion
In summary, increasing money supply could give tailwinds to Bitcoin but complicates the Fed’s inflation-fighting efforts. Persistent inflation indicates challenges remain in achieving price stability through economic policy.
