Part 4/8:
When the Fed begins to cut interest rates, as it did from around 5.3% in August 2024 to about 4.5% by December 2024, it sets off a series of events. Short-term government debt instruments, like six-month T-bills, also see declines in yields due to market anticipation of these cuts. This phenomenon provides the government with cheaper borrowing costs and injects more liquidity into the economy.
To further understand this, we should look at the M2 money supply, which encompasses the total amount of money in circulation. Analyses of the money supply show a steady increase, particularly in the latter part of 2024, resulting from the lower short-term interest rates facilitating more lending and creating dollars through the banking system.