When we last discussed the pending demise of the M3 series of money supply, as per the Fed’s announcement last month, there was suspicion swirling that a devious plot was underway to censor a monetary smoking gun. Several weeks hence, conspiracy theorists will find no reason to abandon the fear that the central bank’s trying to pull a fast one on matters of money supply data.

For those who’ve just arrived to this soap opera, here’s the quick update. The Fed recently decided to cease publishing M3, its broadest measure of money supply. The reason given: M2, a narrower gauge of U.S. money supply, is virtually the same, and eliminating M3 will pare redundancy.
Sounds fine, except for the fact that M2 and M3 aren’t quite the twins the central bank suggests. As we earlier observed, M3’s rate of increase is substantially higher than M2’s, based on the rolling year-over-year change in weekly data. That was true in November, when we last wrote on the topic, and the difference has continued to grow.
Indeed, the disparity in growth rates in M3 vs. M2 has been widening. Based on the latest weekly data released by the Fed, M3 rose by 7.5% in the week ending November 21 vs. the weekly number for 52 weeks previous. That compares with a 3.6% growth rate for M2 over the same stretch. As a result, the spread in M3 over M2 is now 390 basis points, up from 280 basis points on October 31, and zero (no spread) at one point back in February 2004.
It seems reasonable to repeat the question that we posed earlier, namely: Why is the Fed killing the series of money supply that shows the fastest growth? The question is all the more pressing these days since the central bank is on a mission to convince the world that it’s tightening the monetary strings by raising short-term interest rates. M3 arguably suggests something different. But M3’s slated for the trash heap, and la difference is about to be snuffed out. To which we reply, Vive la difference!

2 thoughts on “VIVE LA DIFFERENCE!

  1. Jim Picerno

    Quite true. We, for one, have always watched M2. But the issue here is the growing divergence in the growth rate of M3 vs. M2. Perhaps it’s nothing, but then again perhaps not. Rest assured, more than a few eyes will be watching M3’s relative growth rate in the weeks ahead as the series fades into oblivion. The Fed might actually do itself a favor by keeping it around, if only to prove skeptics wrong.

Comments are closed.