Stephen Miran, who recently concluded a temporary appointment at the Federal Reserve, has returned to Hudson Bay Capital Management and is promoting a renewed focus on monetarism in U.S. monetary policy. In a paper co-authored with economist Nouriel Roubini, Miran advocates revisiting the role of money supply aggregates in understanding inflation dynamics, signaling a potential shift in the Federal Reserve’s approach under its new leadership.

Kevin Warsh, the Federal Reserve’s new chair, has launched five task forces tasked with reimagining various aspects of monetary policy. This effort marks a departure from previous self-examinations under former chair Jay Powell, indicating a more ambitious agenda amid a period of evolving economic challenges. Warsh has suggested that the Fed may have prematurely abandoned monetarist principles, which emphasize the relationship between the money supply, its velocity—the speed at which money circulates—and inflation.

Monetarism, historically associated with economists such as Milton Friedman and Anna Schwartz, holds that inflation is closely linked to the supply of money in circulation. The Fed briefly targeted the money supply in the early 1980s but shifted away from this approach after its practical limitations became evident. Ben Bernanke, a former Fed chair and student of Friedman’s work, notably underscored in a 2006 speech the difficulty of measuring monetary aggregates and the unclear empirical relationship between these aggregates and inflation, leading the Fed to prioritize inflation targeting directly.

Miran does not call for a return to targeting the overall money supply as previously practiced. Instead, he emphasizes a more nuanced measure known as "divisia" aggregates, named after French economist François Divisia. These aggregates differentiate types of money based on their liquidity, from physical currency, which is highly liquid, to government securities such as Treasurys, which are less so. Miran argues that these distinctions provide more precise information on which components of the money supply may drive inflation, potentially explaining why inflation remained subdued during years of rapid reserve growth and why inflationary pressures intensified in 2021 when the Treasury expanded consumer deposits.

While Warsh promotes greater consideration of the money supply in Fed policy, challenges remain, including intellectual debates within the Fed’s own task forces. Thomas Sargent, who co-leads one of the new groups, co-authored a notable paper called “Some Unpleasant Monetarist Arithmetic,” which critiques the limits of monetarism and warns against overreliance on monetary aggregates.

Congress legally mandates the Federal Reserve to monitor monetary and credit aggregates in line with the economy’s potential growth, though the Fed has historically prioritized price stability and full employment targets. Miran’s proposal calls on the Fed either to adopt his divisia measurement framework or, at minimum, to adhere more closely to existing legal requirements regarding money supply monitoring. This conversation signals a broader reevaluation within U.S. monetary policy circles about how best to manage inflation and economic growth in a complex financial landscape.