MONEY SUPPLY AND FINANCIAL MEASURES

MONEY SUPPLY AND FINANCIAL MEASURES Description MONEY SUPPLY AND FINANCIAL MEASURES COMPOUND ANNUAL GROWTH RATES The growth of various measures of money supply have frequently been used to indicate future expected inflationary trends in the economy. Similarly, it has been suspected that easy money has been good for growth in stock markets. The Federal Reserve (Fed) sets targets for growth in money (previously M1-M3, now primarily M2) and both preliminary weekly and monthly results are studied by analysts and forecasters. Weekly or monthly growth rates may vary, but the Fed tries to adjust as needed, and the annual rates are usually close to targets. Historically, the stock market indices are not targeted, but Former Federal Reserve Chairman Greenspan has indicated that the Fed watches the stock market for excessive growth and significant “wealth effects.” More recently, it seems the Fed is considering the drastic declines that have occurred in the stock market. Hence, changes in growth rates indices should be of some interest to the Fed and to average investors who observe how their wealth and retirement funds are growing or decreasing.

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