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What is 'M3'
M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and other larger liquid assets. The M3 measurement includes assets that are less liquid than other components of the money supply and are referred to as "near, near money," which are more closely related to the finances of larger financial institutions and corporations than to those of small businesses and individuals.
Explaining 'M3'The money supply, sometimes referred to the money stock, has many different classifications with respect to liquidity, and M3 is just one of them. The total money supply includes all of the currency in circulation as well as liquid financial products, such as certificates of deposit (CDs). The M3 classification is the broadest measure of an economy's money supply. It emphasizes money as a store-of-value more so than money as a medium of exchange — hence the inclusion of less-liquid assets in M3. It is used by economists to estimate the entire money supply within an economy, and by governments to direct policy and control inflation over medium and long-term periods.
Each M3 component is given equal weight during calculation. This means, for example, that M2 and large time deposits are treated the same and aggregated without any adjustments. While this does create a simplified calculation, it assumes that each component of M3 affects the economy the same way. This can be considered a shortcoming of this measurement of the money supply.
M3's Importance to the Federal Reserve
Since 2006, M3 is no longer tracked by the U.S. central bank, the Federal Reserve (Fed). The Fed had not used M3 in its monetary policy decisions even before 2006. The additional less liquid components of M3 did not seem to convey more economic information than was already captured by the more liquid components of M2.