What is M1 and M2 money?

What is M1 and M2 money?

The terms M1, M2, M3 refer to the monetary aggregates.   For quite some time it was thought that there was a perfect one to one relationship between these numbers and the rates of inflation.  Recently this relationship seems to have broken down, and the money supply numbers have lost some of their appeal to market participants.  It is still important to watch for strong growth in the money supply which might lead to inflationary pressures as money inflates aggregate demand.

M1: Technically defined this is the sum of: the tender that is held outside banks, travelers checks, checking accounts (but not demand deposits), minus the amount of money in the Federal Reserve float.

M2: The sum of: M1, savings deposits (this would include money market accounts from which no checks can be written), small denomination time deposits (where small is less than $100,000), retirement accounts.

M3: M2 plus the large time deposits (for any of you with more than $100,000 deposits you add to this...).   Eurodollar deposits, dollars held at foreign offices of U.S. banks, and institutional money market funds.