The Fed has defined three monetary agregates (M1, M2 and M3) to measure the amount of money circulating in an economy i.e. the overall money supply.

M1 is the narrowest definition of the money supply and includes all coins and currency held by the public, plus travelers checks, checking account balances, and other checkable deposits consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.

Note: the Fed's definition of the money supply includes only what the non-bank sector holds. Thus the reserves of banks, i.e. vault cash and deposits at the Fed, though a part of the monetary base, are not included in the monetary aggregates.



The Fed measures money supply to help guide its monetary policy decisions. Market participants watch for strong growth in the money supply, which might lead to inflationary pressure,s as money inflates aggregate demand.