The Federal Reserve faces a momentous decision in the coming weeks. Markets expect the central bank to increase rates by a quarter of a percentage point, marking a significant slowdown in its history-making pace of hikes.

The dial-back, if implemented, will be for good reason—the rate hikes look like they are starting to work. The annual pace of inflation in December cooled for six straight months and looks set to continue to slow.

There’s another sign that the Fed’s rate hikes are working: The amount of money in the economy contracted in December. The growth of M2—a measure of money supply in the economy that includes currency in circulation, balances in retail money-market funds, and savings deposits, and more—had been slowing over the past two years after a surge in 2020, but December numbers show a decline.

The money supply growth rate for December was a negative 1.3% versus a year ago, the lowest ever and marking the first-ever decline in M2 based on all data available. The Fed started tracking the metric in 1959. November’s growth was already at 0.01%, well below the peak of 27% growth in February 2021.

The fall points to a cooling economy and a strong pass-through of higher rates, one that would seem to feed recent recession fears. A strong economic decline, however, isn’t what the metric is signaling. M2 is still 37% higher than it was before the pandemic despite going through one of its sharpest decelerations. In other words, the amount of liquidity in the system remains high, economists say, a sign that more needs to be done to normalize the economy.

“Households are still sitting on much of these [2020] deposits,” says Viral Acharya, former deputy governor of the Reserve Bank of India and current economics professor at NYU Stern, referring to the stimulus checks that led to a surge in bank deposits in 2020.

That’s not the only reason M2 spiked—and has been falling rapidly. For that, we can look at the Fed’s balance sheet actions. “Quantitative easing,” or bond buying, by the Fed during the pandemic helped juice the economy and the central bank’s balance sheet, pushing it to nearly $9 trillion. Now, the Fed is trimming its total assets by so-called quantitative tightening, which is reducing liquidity.

The Fed’s total assets were down 5.3% on Jan. 18 since last year’s peak, yet the balance sheet remains more than double the $4.1 trillion in February 2020 before the onset of the pandemic. That’s a lot of money, but the Fed doesn’t want to risk upending financial markets by going any faster with the tightening.

The Fed “does not want to convert monetary tightening into an episode of financial instability,” said Acharya, who along with three other economists published a paper in August titled Why Shrinking Central Bank Balance Sheets is an Uphill Task.

Ultimately, as M2 retreats further it should continue to help cool inflation as the dip in money reserves crimps demand and lowers “capacity to support bank loans and other financing for households, firms, and financial market transactions,” said Nathan Sheets, Citi’s global chief economist.

But investors shouldn’t assume that declining M2 will automatically signal an economic slowdown, writes Merion Capital Group’s Richard Farr. M2 “needs to fall by at least another trillion dollars,” to even matter, he said.

That’s a long way to go.