What Is Included in the M2 Money Supply?

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The M2 money supply is the Federal Reserve’s measure of money held by the U.S. public in forms that can be spent directly or turned into spendable money quickly with little cost. It equals M1 (currency and liquid deposits) plus small-denomination time deposits and retail money market fund balances. Stocks, bonds, Treasury bills and large institutional balances fall outside it.

What M2 includes

M2 is built in layers, starting with the narrowest money.

M1 components

• Currency in circulation: paper money and coins held by the public. Cash sitting in a bank’s own vault is excluded, because it is the bank’s inventory rather than money held by households or businesses.
• Demand deposits: checking account balances.
• Other liquid deposits: savings deposits, including money market deposit accounts at banks, plus other checkable deposits.

Components M2 adds on top of M1

• Small-denomination time deposits: certificates of deposit and similar deposits issued in amounts under $100,000, with terms longer than seven days. Balances held in IRA and Keogh retirement accounts are subtracted.
• Retail money market fund balances: shares in money market mutual funds held by individuals, again excluding IRA and Keogh balances.

These additions are not usually used to pay bills, but a holder can convert them to cash or checking balances within days, which is why the Fed treats them as “near money.”

What M2 leaves out

The boundary matters because many liquid assets look like cash but are not counted:

• Treasury bills and other securities. A 3-month T-bill is very liquid, but it is a security, not a deposit or fund share, so it is not in M2.
• Stocks and bonds, including shares in stock or bond mutual funds.
• Large time deposits of $100,000 or more.
• Institutional money market funds held by corporations and other institutions.
• Bank reserves held at the Fed, and deposits held by the U.S. government and by banks themselves.
• Retirement balances in IRA and Keogh accounts at banks and money funds.

How the formula works

In compact form:

M2 = Currency + Demand deposits + Other liquid deposits + Small time deposits + Retail money funds

The Fed publishes these figures in its H.6 Money Stock Measures release, and the St. Louis Fed’s FRED database carries the series under codes such as M2SL (monthly, seasonally adjusted) and WM2NS (weekly, not seasonally adjusted). A chart of either series shows the dollar level of M2; growth rates are derived from changes in that level.

Worked example

Hypothetical household and business, for illustration only.

1. A transfer within M2. A business moves $10,000 from its retail money market fund into its checking account. M1 rises by $10,000 because checking is in M1. M2 does not change, since both accounts were already inside it.
2. A purchase outside M2. A saver withdraws $5,000 from a savings account to buy Treasury bills from a dealer. The saver’s M2 holdings fall by $5,000. Whether total M2 falls depends on the seller: if the bills come from the Treasury, the money leaves the public’s deposits; if they come from another household, that household’s deposit rises and M2 is unchanged.
3. Buying stocks. An investor uses $2,000 from checking to buy shares on an exchange. The seller receives $2,000 in deposits, so M2 overall stays the same. Stock prices are not part of M2, which is why comparing M2 with the S&P 500 compares two different things: a stock of money and the market value of companies.

Why M2 is used

Economists track M2 because it captures money people can spend now plus money they can reach quickly. The quantity theory of money, written as MV = PY (money times velocity equals the price level times real output), links the money stock to nominal GDP. If M grows much faster than real output and velocity holds steady, the identity implies upward pressure on prices, which is why M2 growth is often read alongside the Consumer Price Index.

The Fed’s dual mandate is maximum employment and stable prices. Today the Fed steers policy mainly through its interest rate target and balance sheet, not by targeting M2 directly. M2 still shows the direction and scale of monetary conditions. Its largest recorded surge came in early 2020, when it rose from about $15.3 trillion in February to about $18 trillion in June as pandemic relief payments and Fed asset purchases landed in deposit accounts. Rapid M2 growth is often described as “money printing,” but most M2 consists of bank deposits, which also expand when banks lend and shrink when loans are repaid.

Limitations

• Unstable velocity. The link between M2 and inflation depends on how fast money changes hands, and velocity has shifted sharply over the decades. The Fed stopped setting M2 growth ranges in 2000 because the relationship had become unreliable. Inflation history is available in our U.S. inflation rate by year data.
• Definitional breaks. The May 2020 reclassification moved savings deposits into M1, making M1 jump overnight with no change in actual spending power. Long M1 charts need that break in mind; M2 was unaffected because savings deposits were already in it.
• Close substitutes excluded. Treasury bills, institutional money funds and large deposits can behave like cash for some holders, yet they sit outside M2.
• U.S. only. M2 measures dollars held by the U.S. public. Other countries publish their own broad money aggregates with different definitions, so “global M2” figures combine series that are not built identically.

M2 compared with M1 and M3

The Fed dropped M3 because it judged that the measure added little information beyond M2 while costing money to collect. That leaves M2 as the broadest official U.S. aggregate. For the wider idea of what counts as money and how banks create it, see what money is.

The Bottom Line

M2 matters most to anyone reading monetary conditions, inflation pressure, or claims about money printing. It counts cash, deposits and retail money funds, while Treasury bills, stocks, large deposits and institutional funds sit outside it. Because velocity is unstable and the Fed no longer targets M2, readers should treat its growth as a signal of direction and scale rather than a direct forecast of prices.