- Key insight: The first monetary policy report under Federal Reserve Chair Kevin Warsh reflects his focus on monetarism and the role of the money supply in driving inflation.
- Expert quote: "I think money, strangely enough, has something to do with monetary policy. It has been absent from the discussion." — Federal Reserve Chair Kevin Warsh, in remarks during a Hoover Institution event last year.
- Forward Look: Warsh will discuss the findings in this year's report along with a host of other topics when he testifies in front of the House Committee on Financial Services on Tuesday and the Senate Banking Committee on Wednesday.
The Federal Reserve's first monetary policy report under Kevin Warsh features a measure of financial activity not typically included in the semi-annual briefing: the money supply.
Released Friday morning, the report notes that the M2 monetary aggregate — which includes cash, savings deposits, small-denomination timed deposits and retail money mark funds — was, on average, 4.7% higher in the first five months of 2026 than during the corresponding period last year. The report describes this increase as a return to pre-pandemic levels of growth.
"The rates of increase in M2 seen so far this year have been closer to the range typically observed in the 2010s and stand in contrast to the first half of the current decade, which saw high double-digit growth rates of M2 followed by a period of negative growth rates," the report states.
It also notes that the velocity of the money supply, a ratio comparing economic growth against the average M2 volume, was around the level seen in the fourth quarter of 2019. "The sizable increase in the public's holdings of real money balances that took place during the pandemic has largely been unwound," the report states.
The 77-page document, released ahead of Warsh's upcoming trip to Capitol Hill next week to testify in front of members of the House and Senate, largely mirrors the structure and content of equivalent reports from the past several years. The inclusion of a section on the M2 monetary aggregate is among the few additions to this year's edition.
The money supply was once a key focal point of central bankers — including Paul Volcker, who served as the Fed chair from 1979 to 1987 — and is the basis for a school of thought known as monetarism, which asserts that the money supply is the key driver of economic growth. This ideology has fallen out of fashion in recent decades, with monetary policymakers in the U.S. and around the world focusing more on the demand-side monetary policy centered on inflation targeting.
Before being appointed to lead the institution, Warsh frequently channeled monetarists like Milton Friedman to critique the Fed's quantitative easing practices, arguing that "inflation is a choice" by the Fed. He has also been critical of the move away from monetarism among mainstream economists.
"Milton believed … that monetary policy and inflation is about money," Warsh said last year
He noted that most of the conversation on the Federal Open Market Committee, based on meeting transcripts, tend to follow Keynesian economics, a school of thought that calls for more interventionist policies.
"You're going to have to look for a long time until you see that word 'money.' I think money, strangely enough, has something to do with monetary policy. It has been absent from the discussion," Warsh said. "I think this is part of the reason why this great inflation came back. Because while Milton himself, I don't believe, would have held exactly to the model he had in his mind 30 years ago, he would have said money has something to do with it."
The report was largely a summary of the Fed's recent economic observations and analysis. Inflation has remained above the central bank's target of 2% and short-term expectations for inflation have also risen — pushing up market-based interest rates — but, the report notes, longer term expectations remain well anchored.
Under financial conditions, the report notes that Treasury yields have risen, particularly at shorter durations, as a result of the
In the banking sector, the report pointed to loan growth as a result of easier standards and stronger overall demand. It stated that the banking system is strong and well capitalized but flagged some potential weaknesses related to the private credit sector, which has experienced an uptick in redemption requests this year reflecting "defaults and concerns about the quality of underlying assets."
Warsh will discuss the findings in this year's report along with a host of other topics when he testifies in front of the House Committee on Financial Services on Tuesday and the Senate Banking Committee on Wednesday.
