The Federal Reserve (the Fed) pays for the bonds it buys with money it creates. Its total assets show how much it holds. From August 2008 to December 2014, they rose 4.9 times over, an increase of $3.59 trillion. Inflation on the Consumer Price Index (CPI) averaged 1.6% a year from 2009 to 2014.
From February 2020 to April 2022, the Fed's total assets rose by $4.81 trillion. That was more in dollars, but a smaller multiple, at 2.2 times. This time, inflation reached 9.1%. Large bond buying by the Fed is what the phrase money printing describes. Here is what it means in practice, what happened to the money people spend and why only one episode ended in high inflation.
Does money printing cause inflation? It can, when the new money reaches people who spend it faster than the economy can produce more. When the Federal Reserve buys bonds, it mainly creates bank reserves, which households and firms cannot spend. Some buying also adds to bank deposits, which they can spend.
From 2008 to 2014, the Fed's total assets grew 4.9 times over. Most of the new money stayed with banks as reserves. The M2 money supply, mostly cash and bank deposits, grew 6.6% a year. CPI inflation averaged 1.6%.
In 2020–22, the government borrowed to send relief payments to households. The Fed bought Treasury debt equal to more than 1/2 of the new borrowing. M2 grew a record 26.8% in the year to February 2021. Inflation peaked at 9.1% in June 2022.
How fast money is spent matters as much as how much exists. That speed, called velocity, fell through 2008–14, then rose from 2021 to 2023.
What money printing means in practice
The Fed does not print banknotes to buy bonds. When it buys a bond, it pays by crediting reserves to the seller's bank. Reserves are money that banks keep in their own accounts at the Fed. Buying bonds on a large scale this way is called Quantitative Easing (QE). We explain it in What Is Quantitative Easing?
Reserves are not money people can spend. Banks use them to pay each other. A 2014 Bank of England paper put it plainly. Banks cannot lend reserves on to consumers. Consumers do not hold reserve accounts.
The money people spend is cash and bank deposits. The broad US measure is M2. It covers cash, checking and savings deposits, small time deposits and retail money market funds. When the Fed buys a bond from a pension fund or an insurer, the seller's bank deposit rises too. So QE can lift M2. Whether that money then gets spent is a separate question.
The Fed's total assets and M2 since 2007
Source: FRED (WALCL, M2SL); YX Insights
The chart shows the Fed's total assets and M2 since 2007. In the first episode, total assets rose from $0.91 trillion in August 2008 to $4.50 trillion by the end of 2014. Over the same period, M2 rose 50%, or 6.6% a year.
In the second, total assets rose from $4.16 trillion in February 2020 to $8.97 trillion in April 2022. M2 rose 39% from February 2020 to December 2021, in under two years.
M2 growth and inflation in the two episodes
Source: FRED (M2SL, CPIAUCNS); YX Insights
The chart shows the yearly growth of M2 against CPI inflation. In the first episode, M2 growth peaked at 10.3%, in January 2012. Inflation peaked at 3.9% in September 2011.
In the second, M2 grew 26.8% in the year to February 2021. That was the fastest since the series began in 1959. Inflation peaked at 9.1% in June 2022, 16 months after M2 growth peaked. M2 then shrank. In the year to April 2023 it fell 4.6%. It had never fallen over a year since the series began.
The quantity theory of money and M2 velocity
The quantity theory of money links money to prices in one line, MV = PY:
M is the money supply, here M2.
V is velocity: how many times a dollar is spent on the economy's output in a year. It equals Gross Domestic Product (GDP) divided by M2.
P is the price level.
Y is real output, the volume of goods and services produced.
In plain words, money times how often it is used equals the value of everything sold. If M rises while V and Y hold steady, P must rise. If V falls as fast as M rises, prices need not move.
Source: FRED (M2V); YX Insights
In 2008–14, velocity moved against M2. It fell 19% from the third quarter of 2008 to the end of 2014, from 1.90 to 1.54. Each dollar changed hands less often, so faster M2 growth did not mean faster spending.
In the second quarter of 2020, velocity fell to 1.13, its lowest on record. Consumer spending fell 17.4% from February to April 2020 as lockdowns closed shops. It was still 1.15 in the second quarter of 2021. By the end of 2023 it had risen 19%, to 1.37. Over the same years, households spent down the extra savings they had built up, by a San Francisco Fed estimate. More money, turning over faster, meant more spending while supply was squeezed.
The two episodes side by side
Measure | 2008–14 | 2020–22 |
|---|---|---|
Fed total assets | $0.91 trillion (August 2008) to $4.50 trillion (December 2014): up $3.59 trillion, 4.9 times | $4.16 trillion (February 2020) to $8.97 trillion (April 2022): up $4.81 trillion, 2.2 times |
Bank reserves at the Fed | $10 billion (August 2008) to a peak of $2.81 trillion (July 2014) | $1.63 trillion (February 2020) to a peak of $4.28 trillion (December 2021) |
M2 money supply | Up 50% (August 2008 to December 2014) | Up 39% (February 2020 to December 2021) |
Fastest M2 growth over a year | 10.3% (year to January 2012) | 26.8% (year to February 2021) |
M2 velocity | 1.90 (third quarter of 2008) to 1.54 (end of 2014) | 1.39 (first quarter of 2020) to 1.13 (second quarter of 2020); 1.15 (second quarter of 2021); 1.37 (end of 2023) |
CPI inflation | Mean 1.6% a year (2009 to 2014); peak 3.9% (September 2011) | Peak 9.1% (June 2022) |
Source: FRED (WALCL, WRESBAL, M2SL, M2V, CPIAUCNS); YX Insights
Each row uses the window that best shows that measure, with dates in each cell. Reserves rose by a similar amount each time, about $2.8 trillion and $2.7 trillion. The big differences were in M2, in velocity and in inflation.
Why 2020–22 was different
Three differences stand out.
Where the new money went. In 2008–14, little of it reached households. St. Louis Fed economist Christopher Neely wrote in 2023 that "banks essentially swapped bonds for reserves." The Fed had also begun paying interest on reserves in October 2008. Banks could earn a return by leaving them there.
Who received it. In 2020–22, the government borrowed to send relief payments to households and firms. From the first quarter of 2020 to the end of 2021, debt sold to the public rose $5.94 trillion. From March 2020 to December 2021, the Fed bought $3.15 trillion of Treasury debt, more than 1/2 of that amount. In effect, the Fed bought much of the debt that paid for the relief. A 2022 Fed staff note measured where the money landed, from the end of 2019 to the end of 2021. On its calendar-year basis, bank deposits grew more than $4.5 trillion, while reserves grew just under $2 trillion. Household deposits rose $3.8 trillion, nearly 2/3 of the increase. We cover the relief laws in What Is Fiscal Policy?
What supply could do. In 2021 and 2022, supply chains were jammed. Energy prices jumped after Russia invaded Ukraine in February 2022. More spending met fewer goods. A 2023 study by Ben Bernanke and Olivier Blanchard found that these shocks to prices drove most of the surge in its early stages. So money growth was one cause among several. We cover the wider causes in What Is Inflation?
How to read money supply figures
A few checks help:
Separate reserves from deposits. Bigger Fed total assets do not by themselves mean more spending money. Check what M2 is doing.
Read velocity with M2. M2 growth with falling velocity left prices calm in 2008–14.
Apply it today. M2 grew 5.7% in the year to August 2026, while CPI inflation was 3.4%. Velocity was 1.42 in the second quarter of 2026. Watch whether M2 growth and velocity rise together.
Money printing causes inflation when the new money reaches people who spend it faster than the economy can supply goods. In 2008–14, QE money mostly stayed with banks as reserves. In 2020–22, the Fed bought much of the debt that paid for relief payments. That money landed in household accounts. It was spent while supply was squeezed, so inflation followed.
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