Did the Federal Reserve's Quantitative Easing Add to M1?

Quantitative easing (QE) is an unconventional monetary policy tool that the Federal Reserve, the U.S. central bank, engaged in from November 2008 to October 2014. During that time, the Fed used newly created money to purchase Treasuries, mortgage-backed securities and debt issued by Fannie Mae and Freddie Mac from its member banks. All told, the central bank increased its assets by $3.6 trillion to a total of $4.5 trillion. The Fed's member banks' assets increased accordingly, allowing them to lend more and having a similar effect to printing money.

While QE had a profound effect on the money supply, however, it did not directly increase M1, which measures the supply of coins and bills in circulation, checking account deposits, and certain other instruments such as travelers' checks.


Quantitative Easing

QE is analogous to printing money, but the newly created money the Fed used for its asset-buying program remained in a notional, electronic form. It did not take the form of bills and coins. Nor did it end up in bank customers' checking accounts. In fact, to prevent rapid growth in the money supply as a result of the Fed's asset purchases, the central bank asked the Treasury to sell securities and deposit the proceeds in the Supplemental Financing Account at the Fed. That pushed the latter's liabilities up by around half a trillion dollars in early 2009.  

QE caused MB–the monetary base, which includes central bank money–to outstrip M1 immediately after the first phase of QE (QE1) began. It has continued to exceed M1 ever since, though the gap narrowed after the third and final phase (QE3) ended in 2014.

On the other hand, M1 growth clearly accelerated as QE got underway. This was not a direct, mechanical result of growth in MB, but it does have to do with the Fed's response to the financial crisis.

As the housing market began to tank, the central bank made several deep cuts to the federal funds rate, taking it from 5.25% in mid-2007 to an unprecedented low of 0% to 0.25% in December 2008. It did not hike rates again for seven years, and then only by a quarter of a percentage point.

Ben Bernanke, the Fed chair at the time, wrote in July 2009, "as the economy recovers, banks should find more opportunities to lend out their reserves"; these reserves, the liabilities side of the Fed's balance sheet, increased dramatically under QE. "That would produce faster growth in broad money (for example, M1 or M2)." Low rates encourage banks to lend: since profit margins on loans become thinner, higher volumes are needed to generate the same earnings. From borrowers' perspective, demand for loans increases as the price of borrowing falls. At the same time, the incentive to stash savings in interest-bearing accounts falls, so checking account deposits rise. All of these effects push up M1.