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Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

March 28, 2023

Luis Alvarado, Global Fixed Income Strategist

The Fed’s money supply challenge

The chart features the three-year average growth rate of the Consumer Price Index (top clip) and the three-year average growth rate of the M2 money supply (bottom clip). This chart shows the long-term inflationary pressures from the monetary perspective. M2 money supply consists of M1 money supply (currency at large, demand deposits, other checkable deposits plus savings accounts, time deposits under $100,000, money market mutual fund shares, overnight repurchase agreements, and Eurodollar deposits). The chart shows that with a spike in money supply after the start of the coronavirus pandemic in 2020, inflation has also spiked.Sources: Bloomberg and Wells Fargo Investment Institute. Data as of February 28, 2023. Monthly data from January 1, 1963 to February 28, 2023. Inflation is represented by the U.S. Consumer Price Index and M2 money supply is represented by the M2 Index. This chart was excerpted from the Investment Strategy report dated March 20, 2023

The historical relationship between inflation and money supply

Last week, the Federal Reserve (Fed) raised the federal funds rate by 0.25%, taking the upper end of the range to 5%. The Fed now faces a trickier task — not only continuing to calibrate between elevated inflation (top chart) and diminishing economic growth, but also ensuring that an abrupt tightening of financial and credit conditions does not push the economy into a deeper-than-expected slowdown.

Away from the attention of rate hikes, some market participants have been concerned about the rapid decline in monetary supply1 (bottom chart) over the past 10 months. The argument essentially boils down to the view that the Fed has been targeting the wrong issue (wage growth) and using an inadequate tool (rate hikes). They argue that, instead, the Fed should be focusing on growing monetary supply.

What it may mean for investors

Since monetary policy affects the broader economy with long and variable lags, it becomes even more important to manage interest-rate and liquidity risk in portfolios. We reiterate our preference for government securities — particularly U.S. Treasuries — as well as municipal bonds, as they have tended to be more resilient than other sectors when the economy slows or when financial risks are elevated.

1 Monetary supply as measured by M2, an aggregate measure of U.S. money stock that includes currency, savings deposits, small time deposits, and shares in retail money market funds. For a more detailed explanation please refer to the disclosures section of this report.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest. Unlike U.S. government securities, agency securities carry the implicit guarantee of the U.S. government but are not direct obligations. Payment of principal and interest is solely the obligation of the issuer. If sold prior to maturity, both types of debt securities are subject to market risk.


An index is unmanaged and not available for direct investment.

Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

M2 Index measures the money supply that includes cash, checking deposits, and other types of deposits that are readily convertible to cash such as CDs.

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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