The Federal Reserve's total assets rose by $18.5 billion to $2.45 trillion as the central bank bought Treasury securities as part of the second round of its quantitative easing strategy.

Treasuries held by the Fed rose by $34.9 billion to $1.11 trillion as of yesterday, according to a weekly release by the central bank today. Mortgage-backed securities held by the Fed fell by $15.1 billion to $965.1 billion, while holdings of federal agency debt fell by $1.26 billion to $144.6 billion in the week ended Jan. 26.

The central bank has purchased $266.5 billion in Treasuries since Nov. 12 under plans to purchase $600 billion of government debt through June and reinvest proceeds from maturing mortgage debt. The program represents the Fed's second round of unconventional monetary easing aimed at spurring economic growth and preventing inflation from falling too low.

M2 money supply rose by $46.6 billion in the week ended Jan. 17, the Fed said. That left M2 growing at an annual rate of 3.5 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

Eoin Treacy's view

My view - The USA has been the largest proponent of quantitative easing and the Fed's balance sheet has expanded rapidly over the last two years. Unsurprisingly, this has sparked a certain amount of disquiet among investors about the integrity of the currency, particularly when the expansion of M2 is occurring against a background of high fiscal deficits.

A debate has raged over whether inflation or deflation would prevail in the US economy, Right now the former is in the ascendency. A number of food commodities are hitting record highs and energy prices are reasserting medium-term uptrends. Just about everyone is remarking on the higher costs of food and energy. Higher inflation has also been at least one of the catalysts which have spurred political upheaval in Tunisia, Egypt and Yemen.

The rapid expansion of M2 during the panic that marked October 2008 was justified as essential to prevent a collapse of the banking system and the wider economy. The pace of the expansion tapered off from early 2009, but gained momentum again from April last year even though the recession has ended.

While the supply of money is interesting, it cannot be looked at in isolation. The Velocity of M2 plays an integral part in ascertaining whether the rapid expansion of M2 is likely to lead to significant medium-term inflationary pressures. The Velocity of M2 topped out in 1997 and accelerated lower from July 2008. It remains subdued, so the expansion in supply of money is helping to compensate for the slowdown in economic activity.

This long-term chart of M2 multiplied by the Velocity of M2 shows a long uptrend where M2 was adjusted to accommodate for the greater volatility of the Velocity of Money for over 40 years. However, the interaction has been much more troubled since 2008. The expansion of M2 has so far not been enough to reaffirm the uptrend. This log scale chart of the same relationship highlights the loss of momentum.

It is a reasonable assumption that policy makers will not be truly convinced that deflationary pressures have been defeated until this uptrend is reasserted. The problem with this perspective is that expansive monetary policy will need to be left in place until after the Velocity of M2 begins to recover. In such circumstances, the potential for inflation to become a much more pressing issue would greatly increase.