Money supply is measured in a variety of ways, but the most widely cited measurements are M1, M2 and M3 -- the "monetary aggregates." M1 is chiefly currency in circulation and bank checking accounts. M2 is M1 plus savings accounts, CDs under $100,000, retail money-market fund shares and overnight repurchase agreements. M3 is M2 plus CDs over $100,000, institutional money-market funds and term repurchase agreements.
The Fed sets target ranges for the growth rates of M2 and M3. The 1999 ranges are the same as 1998's: 1% to 5% for M2, and 2% to 6% for M3. In 1998, M2 grew 8.5%, while M3 grew 10.9%. In 1999, M2 is growing at a 3.4% pace, while M3 is growing at a 3.7% pace.
Money-supply growth depends on interest rates, specifically the fed funds rate. Raising the fed funds rate curbs money supply growth, while cutting the rate accelerates it.
From 1979 to 1982, monetary policy focused on achieving a certain rate of M1 money supply growth. Changes in demand for money (loan demand) were allowed to influence the fed funds rate. For example, if money supply growth outpaced the target rate, the Fed would raise the fed funds rate to curb it. This reflected the monetarist tenet that the money supply is the main determinant of economic activity.
The Fed stopped targeting money supply growth and started targeting the fed funds rate because, it explains, "the combination of interest rate deregulation and financial innovation disrupted the historical relationships between M1 and the objectives of monetary policy." In other words, the development of new types of financial products complicated measurement of the money supply.