Accelerating Money Growth: Is M2 Telling Us Something?

When things appear to be working well, there’s a natural reluctance to tinker. For several years now, the policymaking arm of the Federal Reserve System, the Federal Open Market Committee (FOMC), has conducted monetary policy in a framework in which money growth plays no formal operational role. Since the summer of 1993, when Federal Reserve Chairman Alan Greenspan reported that M2 had been de-emphasized, economic outcomes have been quite favorable. Output growth has accelerated to an average rate of about 3 percent over the period, and inflation has fallen to nearly 2 percent thus far in 1997. Moreover, the “core” rate of inflation—the Consumer Price Index (CPI) less food and energy— rose 2.2 percent over the 12-month period ending last September, the smallest annual increase since 1966. Such results do not inspire a significant change in the way policy is implemented.