Money Multiplier: An Updated Look

I have noted previously about how last month the FRB updated its measure of M1, whereby they are now including savings accounts into the equation. Prior to May 2020 savings accounts were excluded from the M1 measure due to the withdrawal restrictions that these accounts had. The inclusion of savings accounts had the effect of increasing the amount of M1. As a result of this change, I have updated the money multiplier proxy that I shared in a previous post.

As you can see from the graph below, there is a drastic jump in May 2020 that reflects the inclusion of savings accounts. What is also obvious is that the money multiplier has somewhat flatten over the last several months. It is difficult to forecast what the future holds, but the amount of liquidity injected in the markets has been so massive that even the slight decline in the money multiplier should not have a meaningful impact in the short-term as to how markets move. In our case, the overall trend is what matters. Nevertheless, as the multiplier decreases, the rate of multiplication is slowing, which means that prices are likely to rise at a slower pace; or in some instances, like the stock market, a correction is likely in the cards if the trend continues. Bear in mind that this metric has a month lag, so at this moment it may not be reflective of the current environment – particularly after the $1.9 trillion fiscal stimulus recently passed by the Biden Administration.

Money Multiplier: April 2018 - February 2021