US money measures accelerated sharply when the Federal Reserve embarked on quantitative easing in late 2008, buying commercial paper and mortgage-backed securities. Three-month growth in the broader M2 aggregate reached an annualised 24% in December – see first chart. The monetary injection laid the foundations for the March / April rally in equities and recent improved economic news.

M2, however, began slowing in early 2009 and has actually fallen over the last four weeks, bringing the three-month rate of change down to 3%. Annual growth remains solid at 8% but has retreated from 10% in January.

Recent M2 weakness has not reflected any slowdown in Fed securities purchases. At its March meeting, the Fed announced a big expansion of its buying plans to a potential $2 trillion by the end of 2009 – second chart. This would imply $1.25 trillion of purchases over the remaining eight months of the year, or about $35 billion per week. Recent buying has been on roughly this scale.

Unlike the ECB and Bank of England, the Fed does not publish a “counterparts analysis” of the drivers of M2 growth but it appears that the expansionary impact of official securities purchases has been offset by a recent contraction in bank lending to the private sector. Commercial bank loans and leases outstanding have fallen at an annualised 5% rate over the last three months – third chart.

On further analysis, this contraction mainly reflects declines in commercial and industrial loans and advances under sale-and-repurchase agreements. Corporate lending has been depressed by recent heavy destocking while the fall in repo advances is consistent with other evidence of investor deleveraging. With the stocks cycle turning, and investor risk appetite beginning to revive, lending trends could improve going forward.

M2 trends are not yet ringing alarm bells but a further slowdown would question the sustainability of recent equity market gains and tentative economic improvement.