The latest figures for the week to March 5th show that US money supply rose by over $15 billion to $9800 billion.

An increase in M2 will not necessarily lead to an increase in inflation, especially if an economy is going through what Keynes described as the ‘liquidity trap’. In such a case the increase in M2 helps to get idle resources working again. Also during a recession, people tend not to spend much money and so the ‘velocity of circulation’ is low and this also helps to keep inflationary pressures low.

However the US economy is starting to show some vibrant signs, with manufacturing output on the increase and unemployment starting to fall; consumer and business confidence are also starting to return to the economy. That means that any increase in M2 will now likely start to have an inflationary impact and its no surprise to see US rates starting to rise.