[fungizid]

The steep increase at the end mostly does not reflect a change in economic fundamentals but rather banks relabeling savings accounts as transaction accounts in response to regulatory changes. If you look at M2 instead of M1, the increase disappears.

More info: https://fredblog.stlouisfed.org/2021/05/savings-are-now-more...

(Edit: Updated link to a more recent blog post)

[andruby]

Still a huge jump in M2 in Feb 2020: https://fred.stlouisfed.org/series/M2NS

[fauigerzigerk]

Yes, but this 32% increase was not initially new money in anyone's pocket. The Fed simply replaced some treasuries and other debt on banks' balance sheets with reserves, which don't have to be backed by equity.

This gave banks more wiggle room to sit out the pandemic without reducing lending at the exact wrong time.

So the Fed has done its job on the way down. Now they just have to do their job on the way up as well, or this money will eventually end up as new money in someone's pocket (via new loans) and potentially create inflation.

[RobertoG]

>>"or this money will eventually end up as new money in someone's pocket (via new loans) and potentially create inflation. "

For that to happen you need enough credit demand in the economy.

It could happen, and, as you say, the Fed would increase the interest rate making reserves less available (credit more expensive), but the number of reserves in the system doesn't cause directly more money in the economy. It depends of the type of recovery.

[fauigerzigerk]

Agreed, but the difficulty is that the Fed cannot easily distinguish between different kinds of credit demand.

They may justifiably want to keep interest rates low and loans easily available to help businesses and governments roll their pandemic induced debt until they can grow out of it.

But then some other credit worthy borrower comes along and snaps up those cheap loans to buy into some asset market that doesn't need any support.

And where they do have the tools to make that distinction they don't appear to be using them. I don't understand why they keep buying mortgage debt while house prices are already looking dangerously inflated.

[annamargot]

Potentially? Seems to me that potential is already being realized.

[fauigerzigerk]

I don't know how we can possibly know that. There are just too many confounding factors right now.

We had this unprecedented crash that clogged up global supply chains and caused a huge shift in what people are buying. We have massive government spending increases. I don't think it's possible to work out what impact QE is having on inflation right now or whether it will indeed be transitory as the Fed believes.

[JohnJamesRambo]

I still see a curve blasting off at an unprecedented accelerated rate after the jump. And after 2009 doesn't look great either.