The latest Federal Reserve data confirms a troubling trend—M2 money velocity is falling, signaling a slowdown in economic activity. The first-quarter report shows M2 velocity at 1.383, down from 1.387 in the previous quarter. This decline suggests that money is changing hands less frequently, a sign that consumers and businesses are holding onto cash rather than spending.
M2 velocity measures how quickly money moves through the economy, reflecting the rate at which dollars are used for transactions. A falling velocity often indicates reduced consumer confidence, weaker business investment, and sluggish economic growth. Historically, sharp declines in M2 velocity have preceded recessions, making this latest drop a cause for concern.
Federal Reserve Chair Jerome Powell has made it clear—the Fed will not cut interest rates anytime soon, citing inflation risks from tariffs and the growing federal deficit. Powell’s latest remarks confirm that monetary policy will remain tight, despite pressure from the White House to slash borrowing costs.
The Fed’s decision comes as President Donald Trump’s tariff policies continue to impact global markets. While the administration slashed some tariffs, duties on Chinese imports remain historically high, keeping inflation risks elevated. Powell warned that if the tariffs remain in place, they could trigger a rise in prices, slow economic growth, and increase unemployment.
The central bank kept rates at 4.25 to 4.5 percent, holding firm against calls for preemptive cuts. Powell dismissed the idea of lowering rates to offset tariff impacts, stating that the Fed must wait for more data before making adjustments. He emphasized that inflation remains above target, making rate cuts too risky at this stage.
The federal deficit is another major concern. Powell acknowledged that government spending is on an unsustainable path, but refrained from offering policy advice to Congress. The combination of high tariffs and unchecked deficit growth has put the Fed in a difficult position—lowering rates could fuel inflation, while keeping them high could slow economic activity.
Sources:
https://fred.stlouisfed.org/series/M2V
https://www.economicgreenfield.com/2025/04/30/velocity-of-money-charts-updated-as-of-april-30-2025/
https://ycharts.com/indicators/velocity_of_us_m2_money_stock