Money Supply

The monetary aggregates (M1 ,M2 and M3) measure money supply by degree of liquidity. M1, M2, and M3 are progressively more inclusive measures: M1 is included in M2, which is included in M3. M1, consists of currency and checkable deposits. The non-M1 components of M2 are household savings deposits, time deposits, and retail money market mutual funds. The non-M2 components of M3 consist of institutional money funds and certain managed liabilities of depositories, namely large time deposits, repurchase agreements and Eurodollars. Changes in the monetary aggregates indicate the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures. Currently, the various money supply measures are not followed by market participants because today, monetary policy is understood more clearly by the level of the federal funds rate. To the extent money supply is still followed, M2 is the favored monetary aggregate. The Fed still targets both M2 and M3 but if the Fed misses its target, it is more likely to change the target than it is to change policy. However, with M2 velocity behaving more predictably since 1994, some Fed policy makers are once again watching M2. Intermediate and long term trends should therefore be noted, but volatile weekly swings are of little consequence to the market. The Money Supply report is scheduled for release at 3:30 (CST) every Thursday by the Federal Reserve.

POTENTIAL IMPACT ON INTEREST RATES: LOW