What is M3? — a practical explainer and how to use it
Key takeaways
– M3 is the broadest traditional monetary aggregate: it includes everything in M2 plus large time deposits, institutional money‑market funds, repurchase agreements (repos), and other large/liquid assets often held by institutions.
– The Federal Reserve stopped publishing U.S. M3 in 2006; the series is still available from other sources (e.g., the St. Louis Fed’s FRED) for historical and analytical use.
– M3 can help signal broad liquidity and credit trends, but it has limitations (equal weighting of components, changing financial structure, and weaker link to day‑to‑day spending). Practitioners typically combine money aggregates with credit, velocity, and market indicators.
What M3 measures (definition and components)
– Purpose: M3 attempts to capture the broadest notion of “money” as a store of value and a source of liquidity across the economy — not just cash used for transactions.
– Components (U.S. practice, pre‑2006): all of M2 (currency, demand deposits/checking, savings deposits, small CDs, retail money‑market funds) plus:
– Large (institutional) time deposits / large-denomination CDs
– Institutional money‑market funds
– Short‑term repurchase agreements (repos)
– Large liquid assets used by financial institutions and corporations
– These added items are less liquid than M1 or M2 items and are often described as “near money.”
How M3 relates to M0, M1, M2 (short primer)
– M0: currency in circulation and central‑bank reserve measures (narrowest).
– M1: M0 + demand deposits and other checkable deposits (highly liquid, used as medium of exchange).
– M2: M1 + savings deposits, small CDs, retail money‑market funds (less liquid).
– M3: M2 + large time deposits, institutional funds, repos, other large/liquid instruments (broadest).
Why the Fed discontinued M3
– The Federal Reserve stopped publishing M3 in 2006. Reasons commonly cited:
– Cost and difficulty of collecting the additional data versus limited incremental value for policy.
– Shifts in financial markets and instruments meant the relationship between aggregates and economic outcomes (inflation, growth) was less stable.
– Over time the Fed placed less emphasis on monetary aggregates as direct policy guides (the Fed focused more on interest rates and a range of indicators). Earlier, in 1993, Fed Chairman Alan Greenspan said the FOMC would not rely on money aggregates as policy guides.
– Note: although the Fed no longer publishes M3, other organizations (notably the Federal Reserve Bank of St. Louis via FRED) continue to offer M3 series for research.
Limitations and measurement issues
– Equal weighting assumption: M3’s components are simply summed; the aggregate assumes each dollar in any component has the same macroeconomic effect, which may be false.
– Financial innovation and regulatory changes: new products, sweep accounts, and institutional arrangements can change the meaning of an aggregate over time.
– Velocity and composition: changes in money velocity or shifts between components (e.g., moved into nonbank institutions) weaken the predictive power of money growth for inflation/output.
– Overlap and classification: distinguishing between “money” and other financial assets can be arbitrary and change with market structure.
How economists and policymakers used M3 historically
– Long‑run signals about liquidity and credit growth: rapid M3 expansion can indicate broad credit creation that might feed asset inflation and later consumer inflation.
– Cross‑checks, not single guides: historically, policymakers treated M3 readings as one input among many (credit, wages, output gaps, inflation expectations).
– Financial‑stability monitoring: M3 components (repos, institutional funds) can reflect stress in wholesale funding markets.
Where you can find M3 data today
– Federal Reserve: discontinued official U.S. publication in 2006 (see Fed announcements/H.6 commentary).
– Federal Reserve Bank of St. Louis (FRED): maintains historical M3 series and related monetary aggregates.
– Other sources: academic databases, commercial data providers, and central banks (other countries may publish broad aggregates; the Bank of England publishes M4 for the U.K.).
– Suggested pages to consult: Federal Reserve Board releases (H.6), Federal Reserve Bank of St. Louis FRED, and central bank statistical pages.
Recent headline numbers (example snapshot)
– As a point of reference (seasonally adjusted, July 2023):
– M1 (U.S.) ≈ $18.4 trillion
– M3 (U.S., FRED series / reconstructed) ≈ $20.9 trillion
(These are illustrative values; check current series on FRED or central‑bank releases for updated numbers.)
Practical steps — how to use M3 (or substitutes) in analysis
For analysts, investors, and policy watchers:
1. Choose the right aggregate(s)
– If M3 is available and meaningful for your period/country, use it for broad liquidity/credit signals.
– Otherwise, rely on M2 plus market‑based indicators (repo balances, commercial paper, institutional money‑market fund assets) to approximate M3‑type liquidity.
2. Combine with other indicators
– Don’t use money growth alone. Track credit aggregates (bank lending, nonbank credit), inflation expectations (TIPS breakevens), wage growth, and output gaps.
– Monitor velocity: compare money growth to nominal GDP to see whether increases in money correspond to higher spending.
3. Monitor composition changes
– Watch which components are changing fastest (e.g., repos vs. large CDs). A shift into repo markets or money funds can signal increased reliance on wholesale funding.
4. Use rolling rates and trends
– Look at year‑over‑year and 3‑ to 12‑month rolling growth rates rather than single monthly moves to filter noise.
5. Watch market stress indicators
– Spikes in repo rates, money‑market fund redemptions, or commercial paper spreads can indicate liquidity strains that broad aggregates might mask.
6. Interpret signals for portfolios
– Rapid, sustained broad money growth > nominal GDP growth: potential inflation/asset‑price risk → consider inflation‑sensitive assets, reduce long-duration fixed income exposure.
– Sharp slowdown or contraction in broad money/credit: potential tightening/recession risk → consider higher quality fixed income, defensive equities, cash buffers.
7. For corporate treasury
– Monitor institutional deposit and short‑term funding markets (repos, commercial paper) for cost/availability of liquidity.
– Stress test funding under scenarios of tightening in money aggregates or repo markets.
8. For policymakers/analysts
– Treat broad money as a cross‑check for monetary and financial stability policy. Combine with credit growth, leverage, and market liquidity metrics.
Practical example workflows
– Macro analyst building an inflation watchlist:
1) Pull M2 and M3 (if available) series from FRED; compute 12‑month growth.
2) Compare money growth to nominal GDP growth and CPI inflation.
3) If money growth persistently exceeds GDP growth and credit expands, upgrade inflation risk.
– Treasury manager assessing short‑term funding risk:
1) Track institutional money‑market fund assets, repo outstanding, and commercial paper issuance weekly.
2) Stress test access to funding by modeling a 20–40% drop in institutional deposits and 100–200 bps spike in repo rates.
Bottom line
– M3 is the broadest classic measure of money supply, capturing not only cash and household deposits but also large institutional deposits, repos, and other near‑money items. The U.S. Federal Reserve stopped publishing M3 in 2006 because its incremental policy value was judged limited and financial structure had changed, but researchers and some data providers continue to publish or reconstruct M3 for analysis. For practical decision‑making, use broad money aggregates as one input among many — combine them with credit measures, market indicators, and economic data, and focus on trends and composition rather than any single number.
Sources and further reading
– Investopedia, “M3” (Joules Garcia) — general overview and definitions.
– Federal Reserve Board — H.6 Release and discontinuance commentary on M3; “Money Stock Measures.”
– Federal Reserve Bank of St. Louis (FRED) — Monetary Aggregates and “M3 for United States” series.
– Federal Reserve Bank of Richmond, “Monetary Aggregates: A User’s Guide.”
– Federal Reserve Bank of San Francisco, “How Did the Fed Change Its Approach to Monetary Policy in the Late 1970s and Early 1980s?”
– Bank of England, “Explanatory Notes — M4.”
(If you want, I can: 1) pull the latest M2/M3 growth charts from FRED for your chosen date range; 2) build an inflation‑signal rule-of-thumb using money growth vs. nominal GDP; or 3) give a checklist of market indicators to monitor weekly.)
(Continuation — expanded coverage, examples, practical steps, and a concluding summary)
Additional sections
Why the Fed stopped publishing M3 (expanded)
– Practical explanation: By 2000s, the Federal Reserve judged that narrow aggregates (M1, M2) and other indicators (inflation, employment, credit spreads, financial conditions) provided adequate information for policy. M3’s components were increasingly driven by large institutional behavior (large CDs, repo, institutional money market funds) rather than household cash and deposit behavior, and the data were more costly to collect and verify.
– Policy implication: Because M3 tracked large institutional flows that did not consistently map to consumer spending or lending conditions, the Fed concluded M3 added little to policy decisions and discontinued its official publication in 2006. Researchers and market participants can still access M3-like series from the St. Louis Fed and private data services.
How M3 relates to monetary theory and policy
– Quantity theory (simple form): M × V = P × Y, where M is a money aggregate (e.g., M3), V is velocity, P is the price level, and Y is real output. If velocity is stable, faster growth in M relative to Y implies higher P (inflation).
– But velocity is not stable in modern economies. Financial innovation, regulation changes, and preferences for liquidity alter V, so M3 changes do not translate mechanically into inflation.
– Use in practice: M3 is useful as a broad “stock” measure reflecting liquidity available to the nonfinancial sector plus large institutional balances, helpful for medium- to long-run analysis of liquidity and inflation pressures — but it must be used alongside credit, income, and velocity metrics.
Where to find M3 data now
– Federal Reserve (official): The Fed no longer publishes M3.
– Federal Reserve Bank of St. Louis (FRED): publishes an M3 series constructed from public sources (useful for trends and historical comparisons).
– Other sources: academic datasets, central banks of other countries (many publish their broad money series), and private data vendors.
– Documentation: check the Federal Reserve H.6 release and the St. Louis Fed’s series notes for methodology and any breaks/adjustments.
Practical steps for analysts, investors, and students
1. Obtain the data
– Download nominal M3 (or a comparable broad-money series) and nominal GDP from reliable sources such as FRED.
– Also download the CPI (or GDP deflator) for inflation adjustment and seasonal adjustment flags if needed.
2. Convert to comparable bases and adjust for seasonality
– Ensure series are on the same frequency (monthly vs. quarterly); convert as needed (aggregation, interpolation).
– Use seasonally adjusted series when analyzing growth rates to avoid calendar noise.
3. Calculate growth rates
– Year-over-year growth: (M_t / M_{t-12}) – 1.
– Quarter-over-quarter annualized: [(M_t / M_{t-1})^4 – 1] for quarterly data.
4. Compute “real” money stock
– Real M3 ≈ Nominal M3 / (CPI / CPI_base). If CPI_base = 100, Real M3 = Nominal M3 / (CPI/100).
5. Compare money growth with nominal GDP growth
– If M growth substantially exceeds nominal GDP growth, and velocity appears stable, that can indicate future upward pressure on prices.
– But analyze velocity: Velocity = Nominal GDP / M. Changes in velocity explain why money growth may not lead to inflation.
6. Decompose M3 changes
– Break M3 into components (M2, large time deposits, institutional money market funds, repos) to see where growth comes from. Growth concentrated in repos or institutional funds may signal different dynamics than growth in household deposits.
7. Use scenario analysis and backtests
– Backtest how changes in M3 correlated with inflation and credit cycles over different periods (pre-1980s, 1980–2000, post-2000) because relationships change over time.
8. Beware structural breaks and measurement changes
– When using long historical series, check for methodological breaks (e.g., regulatory changes, redefinitions) and adjust or annotate accordingly.
Examples (illustrative, simplified)
Example 1 — Interpreting change in M3 vs. GDP
– Suppose: M3 = $20.9 trillion today and a year ago was $19.3 trillion.
– Year-over-year M3 growth = (20.9 / 19.3) – 1 = 8.3%.
– If nominal GDP grew 3.5% over the same year and velocity is assumed constant, then other things equal, price level change ≈ M growth – GDP growth = 8.3% – 3.5% = 4.8% (an inflationary implication).
– Real interpretation: If detailed data show the M3 increase was driven by large time deposits in response to higher interest rates, and velocity fell, the inflationary signal may be weaker. Always check velocity and components.
Example 2 — Computing real M3 and velocity
– Given: Nominal M3 = $20.9T, CPI index = 300 (base 100), nominal GDP = $25.0T.
– Real M3 = 20.9 / (300/100) = 20.9 / 3 = $6.967T (in base-year dollars).
– Velocity = Nominal GDP / Nominal M3 = 25.0 / 20.9 ≈ 1.20.
– Interpretation: Velocity of 1.20 means each dollar in M3 funds roughly $1.20 of nominal GDP per year. Trends in velocity (rising or falling) are crucial for interpreting the monetary stance.
Example 3 — Component analysis: repo-driven M3 spike
– Scenario: Repo agreements in the institutional sector increase sharply because short-term funding is cheap. M3 rises 10% in six months, but household deposits and consumer credit are stable.
– Implication: The liquidity is concentrated in institutional markets; consumer spending may not rise. Policymakers should interpret the M3 increase differently than if household bank deposits had risen.
Use cases: Who should care about M3 and how to use it
– Macroeconomic researchers: Use as a broad liquidity measure when studying medium-term inflation dynamics, financial cycles, and historical comparisons.
– Central banks (in countries that publish it): Useful for monitoring broad monetary conditions, especially in economies where bank deposits and institutional liquidity dominate the channel to spending.
– Investors and strategists: Include broad-money trends as one of many indicators. Rapid broad-money growth can be an input into inflation scenarios, interest-rate forecasting, and asset allocation.
– Risk managers: Monitor large-time-deposit and repo exposures to assess funding risks in stress scenarios.
Caveats and limitations
– Discontinued official publication in the U.S.: For the U.S., M3 is not an official Fed release since 2006. Use reconstructed series with caution.
– Equal weighting shortcoming: Treating components equally in a raw aggregate assumes similar economic impacts across very different instruments — an approximation that can mislead.
– Structural change over time: Financial innovation, regulatory shifts, and changes in market practices can change relationships among money, credit, output, and prices.
– Measurement lags and revisions: Some components (e.g., repos) may be revised, and reporting lags can affect real-time analysis.
Policy and investment implications (practical checklist)
– If M3 growth accelerates:
– Check whether growth is broad-based (households + institutions) or concentrated (repos, large CDs).
– Examine velocity: falling velocity may offset inflationary pressure; rising velocity could amplify it.
– Look at credit growth and lending standards: is bank credit to the real economy expanding?
– Monitor central bank actions and market interest rates: hikes or liquidity operations may follow.
– If M3 growth decelerates or contracts:
– Consider downside risks to nominal growth and inflation (disinflationary pressures).
– Watch for funding stress in wholesale markets if components like repo shrink abruptly.
– For investors: consider implications for risk assets, yield curves, and safe-haven demand.
Additional sections: International comparison and M4 (UK)
– Some countries publish broader aggregates with different naming conventions (e.g., M4 in the UK). M4 often includes broader liabilities of banks and building societies and reflects liquidity circulating among households, the private sector, and financial intermediaries.
– Cross-country comparisons require careful matching of definitions and institutional structures; “broad money” is conceptually similar but constructed differently.
Concluding summary
– M3 is the broadest common measure of money supply, including M2 plus large time deposits, institutional money market funds, repos, and other less-liquid assets. It offers a wide-angle view of liquidity in an economy, particularly institutional and corporate liquidity.
– The U.S. Federal Reserve stopped publishing M3 in 2006 because it was judged less useful for policy relative to cost and because its components increasingly reflected institutional behavior. Nonetheless, M3-like series remain valuable for researchers, investors, and policymakers as a long-run liquidity indicator.
– Interpretation requires care: changes in M3 must be analyzed alongside nominal GDP, velocity, money components, and the real economy. Simple mechanical rules (money growth → inflation) do not always hold because velocity and composition change.
– Practical approach: obtain reliable series, adjust for inflation and seasonality, decompose components, track velocity and credit flows, and use backtests and scenario analysis to guide interpretation.
– For real-time monitoring, pair broad-money analysis with other indicators (credit flows, financial conditions indices, employment, and inflation expectations) to build a robust view of macroeconomic and financial risk.
References and further reading
– Federal Reserve Board. “H.6 Release – Discontinuance of M3.” (Fed announcement)
– Federal Reserve Bank of St. Louis (FRED). Monetary aggregates and M3 series for the United States.
– Federal Reserve Bank of Richmond. “Monetary Aggregates: A User’s Guide.”
– Federal Reserve Bank of San Francisco. “How Did the Fed Change Its Approach to Monetary Policy in the Late 1970s and Early 1980s?”
– Bank of England. “Explanatory Notes – M4.”
– Investopedia. “M3” (original source summary)
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