Understanding the Recent Behavior of M2

The behavior of the monetary aggregates— particularly M2—is often an important consideration in the Federal Reserve’s monetary policy decisions. The Federal Open Market Committee (FOMC), the monetary policymaking arm of the Federal Reserve System, periodically sets a target range for M2 growth, based on economic conditions and on its policy stance. In order to steer M2 growth within these bounds (currently 2’/2 and 6V2 percent), policymakers must be able to predict with precision the demand for M2. This entails understanding why individuals and institutions hold transactions and savings deposits. The determining factors have traditionally been the level of income and the opportunity cost of holding M2 balances. Until recent years, these factors have accurately predicted M2 growth.