13 Week Money Supply Grows at Fastest Rate for June since 2021

Money Supply is a very important indicator. It helps show how tight or loose current monetary conditions are regardless of what the Fed is doing with interest rates. Even if the Fed is tight, if Money Supply is increasing, it has an inflationary effect.

One key metric shown below is the “Wenzel” 13-week annualized money supply figure. It was made popular by the late Robert Wenzel who tracked the metric weekly as an indicator for where the economy might be headed. In 2020, the Fed started reporting the data monthly instead of weekly. It should also be noted that Money Supply data can be heavily revised in future months.

Recent Trends

Seasonally Adjusted Money Supply has been growing on a consistent monthly basis since November 2023. The latest month (June) showed growth of $100B which followed the May increase of $256B which was the biggest monthly surge since 2021.

Warsh spent his entire speech in June explaining how the Fed was going to get tough on inflation and yet May and June have come in as huge months. The Fed meets again this week with a speech to follow; it will be interesting to hear what message they lead with and whether they comment on the massive increases in Money Supply.

Figure: 1 MoM M2 Change (Seasonally Adjusted)

The increase in May was 5.3% annualized, which is above the three-year trend and slightly below the 12-month trend.

Figure: 2 M2 Growth Rates

June is typically one of the weaker months of the year at 4.1% so the 5.3% looks high by comparison.

Figure: 3 Average Monthly Growth Rates

Non-seasonally adjusted shows that June (orange bar) is in line with May and July which were all relatively strong months of growth (note: this data is ahead of the seasonally adjusted data above). The consistency is also worth mentioning. Is this a new trend under Warsh?

Figure: 4 MoM M2 Change (Non-Seasonally Adjusted)

The weekly data shows a similar level of consistency. The latest week (Jul 6th) was one of the biggest weeks since pre-2024.

Figure: 5 WoW M2 Change

The “Wenzel” 13-week Money Supply

The late Robert Wenzel of Economic Policy Journal used a modified calculation to track Money Supply. He used a trailing 13-week average growth rate annualized as defined in his book The Fed Flunks. He specifically used the weekly data that was not seasonally adjusted. His analogy was that in order to know what to wear outside, he wants to know the current weather, not temperatures that have been averaged throughout the year.

The objective of the 13-week average is to smooth some of the choppy data without bringing in too much history that could blind someone from seeing what’s in front of them. The 13-week average growth rate can be seen in the table below.

Growth had been on an upswing but recently saw a fall from 7.5% to 6.91%. Keep in mind, this is still a very alarming rate of growth even though it is decelerating.

Figure: 6 WoW Trailing 13-week Average Money Supply Growth

The plot below shows how the latest year compares with previous years. You can see how 2026 has really jumped out ahead of all the prior years in the chart except for 2020 and 2021 when the Fed blasted the market with stimulus.

This trend change is something to watch. Warsh may sound hawkish, but he acts dovish.

Figure: 7 Yearly 13-week Overlay

Inflation and Money Supply

The chart below shows the history of inflation, Money Supply, and Fed Funds. As shown, in 1970 inflation worked with a ~2-year lag compared to Money Supply. Money Supply slowed dramatically in 2023 and 2024 but has been moving back up. Inflation has also been stickier than the Fed would like, but unfortunately, they cannot do much given the large debt load of the US Government and Corporations. Despite inflation staying elevated, even moving up in the recent period, the Fed has no choice but to continue lowering rates.

The inflation rate is now at parity with the Fed Funds. The inflation rate is at 3.5% which is 10 bps below the Fed Funds rate of 3.6%. The inflation rate has remained above 2% for 5 years now, proving much stickier than anyone originally forecast. This flip is likely why the market is now pricing in the distinct possibility of a rate hike before the end of the year.

To get inflation back down, rates need to be significantly higher than the rate of inflation, so the Fed would need to raise rates by at least a full percentage point, and likely more.

Figure: 8 YoY M2 Change with CPI and Fed Funds

Historical Perspective

The charts below are designed to put the current trends into historical perspective. The orange bars represent annualized percentage change rather than raw dollar amount. You can see that the Money Supply has stayed at a positive and consistent growth level. This is not a good sign if inflation needs to be coming down.

Figure: 9 M2 with Growth Rate

Below shows the 13-week annualized average over history. This chart overlays the log return of the S&P. Mr. Wenzel proposed that large drops in Money Supply could be a sign of stock market pullbacks. His theory, derived from Murray Rothbard, states that when the market experiences a shrinking growth rate of Money Supply (or even negative) it can create liquidity issues in the stock market, leading to a sell off.

While not a perfect predictive tool, many of the dips in Money Supply precede market dips. Specifically, the major dips in 2002 and 2008 from +10% down to 0%. 2022 was highly correlated with a fall in Money Supply and the rebound has corresponded with the big stock market move we saw in 2023 and into 2024.

More liquidity getting pumped into the economy helps explain why the market continues to reach all-time highs despite all the headline risk. With the war still on, oil prices reaching multi-year highs, and a ton of uncertainty, one would expect the market to be under pressure. Sure, it has taken a breather since the recent all-time highs, but it is up substantially over 12 months and only given the last little bit back.

Please note the chart only shows market data through July 6th to align with available M2 data.

Figure: 10 13-week M2 Annualized and S&P 500

One other consideration is the reverse repo market at the Fed. This is a tool that allows financial institutions to swap cash for instruments on the Fed balance sheet.

Reverse Repos peaked at $2.55T on Dec 30, 2022. Money gushed out from March 2023 to May 2024. The balance now sits close to zero.

Figure: 11 Fed Reverse Repurchase Agreements

Wrapping Up

The Kevin Warsh Fed is going to meet this week and undoubtedly commit to getting inflation under control and promising to restore price stability. But don’t listen to their words, watch the data. And the data has been saying that Kevin Warsh is continuing in the footsteps of his predecessors: more money printing. The market may be buying it, but the data tells a different story.