MonetaryTrends June 7 What Is Subprime Lending? Mortgage loans are typically classified as either prime or subprime, depending on their credit risk the risk that a borrower will default on the loan Interest rates are higher on subprime mortgages, reflecting their higher credit risk However, despite its common usage, the prime-subprime distinction is not clear-cut and there is still some confusion regarding a precise characterization of subprime lending Some agencies characterize subprime lending in terms of lender practices For example, the US Department of Housing and Urban Development (HUD) uses Home Mortgage Disclosure Act (HMDA) data and interviews with lenders themselves to identify lenders that specialize in subprime mortgages This approach raises the obvious query: Why not simply look for lenders that make high-priced mortgages? One problem lies in the fact that HMDA reports did not include interest rate data prior to Moreover, HUD argues that a high average mortgage interest rate is neither a necessary nor a sufficient characteristic of subprime lending 1 HUD has published a list of subprime lenders annually since 199, with 1 lenders on the list It notes that, in contrast to prime lenders, subprime specialists typically (i) have fewer originations, (ii) have a higher share of refinance loans as a proportion of total originations, and (iii) sell a smaller percentage of their portfolios to the government-sponsored enterprises (GSEs), ie, Fannie Mae and Freddie Mac Importantly, HUD notes that some prime lenders originate a significant number of subprime loans and some subprime lenders also originate prime loans A second approach to identifying subprime lending is to focus on borrower attributes, regardless of the lender involved In a joint proposal to provide expanded guidance to institutions that engage in subprime lending, the federal bank and thrift supervisory agencies the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Super - vision specify that subprime refers to the credit characteristics of individual borrowers They characterize subprime borrowers as those who display, among other characteristics, (i) a previous record of delinquency, foreclosure, or bankruptcy, (ii) a low credit score, and (iii) a debt service-to-income ratio of percent or greater Again, this checklist includes the caveat that the list is illustrative rather than exhaustive and is not meant to define specific parameters for all subprime borrowers Clearly, a precise characterization of subprime lending is elusive The difficulty lies in that, unlike prime mortgages, subprime mortgages are not homogenous Indeed, each underwriter independently evaluates the credit risk on the mortgage which, in addition to borrower-specific attributes, depends also on the terms of the loan contract Therefore, a third (and perhaps simpler) way might be to define a prime mortgage and then classify other non-prime mortgages as subprime or near-prime Hancock et al () make an attempt in this direction by dividing the first-lien conventional mortgage market into three broad credit risk segments based on a couple of summary characteristics First, creditworthiness of the mortgagor is summarized by her credit score Second, the terms and conditions of a mortgage contract are summarized by the loan-to-value ratio Hancock et al () use these two characteristics to define three segments of the mortgage market as shown in Table 1 This definition provides a muchneeded benchmark to clearly define subprime loans, and its appeal lies in its simplicity Rajdeep Sengupta and William R Emmons 1 More details are available on the HUD web site: wwwhuduserorg/datasets/manuhtml For details on the supervisory guidance, see wwwfederalreservegov/boarddocs/press/bcreg/7/7/defaulthtm Summary of Conventional Mortgage Market Segment Definitions Loan-to-value ratio Credit score < -9 >9 or higher Prime Near-prime Subprime 1 to 9 Near-prime Near-prime Subprime or lower Subprime Subprime Subprime SOURCE: Hancock, Diana; Lehnert, Andreas; Passmore, Wayne and Sherlund, Shane M An Analysis of the Potential Competitive Impacts of Basel II Capital Standards on US Mortgage Rates and Mortgage Securitization Basel II White Paper No, Board of Governors of the Federal Reserve System, Views expressed do not necessarily reflect official positions of the Federal Reserve System researchstlouisfedorg
Contents Page Monetary and Financial Indicators at a Glance Monetary Aggregates and Their Components Monetary Aggregates: Monthly Growth 7 Reserves Markets and Short-Term Credit Flows Measures of Expected Inflation 9 Interest Rates 1 Policy-Based Inflation Indicators 11 Implied Forward Rates, Futures Contracts, and Inflation-Indexed Securities 1 Velocity, Gross Domestic Product, and M 1 Bank Credit 1 Stock Market Index and Foreign Inflation and Interest Rates 1 Reference Tables 1 Definitions, Notes, and Sources Conventions used in this publication: 1 Unless otherwise indicated, data are monthly Shaded areas indicate recessions, as determined by the National Bureau of Economic Research change at an annual rate is the simple, not compounded, monthly percent change multiplied by 1 For example, using consecutive months, the percent change at an annual rate in x between month t 1 and the current month t is: [(x t /x t 1 ) 1] 1 Note that this differs from National Economic Trends In that publication, monthly percent changes are compounded and expressed as annual growth rates The percent change from year ago refers to the percent change from the same period in the previous year For example, the percent change from year ago in x between month t 1 and the current month t is: [(x t /x t 1 ) 1] 1 We welcome your comments addressed to: Editor, Monetary Trends Federal Reserve Bank of St Louis PO Box St Louis, MO 1- On March,, the Board of Governors of the Federal Reserve System ceased the publication of the M monetary aggregate It also ceased publishing the following components: large-denomination time deposits, RPs, and eurodollars or to: stlsfred@stlsfrborg Monetary Trends is published monthly by the of the Federal Reserve Bank of St Louis Visit the s website at researchstlouisfedorg/publications/mt to download the current version of this publication or register for e-mail notification updates For more information on data in the publication, please visit researchstlouisfedorg/fred or call (1) -9
updated through //7 Monetary Trends M and MZM Billions of dollars 77 7 97 MZM Treasury Yield Curve Week Ending Friday: // /7/7 //7 7 7 M 97 7 7 y 7y 1y y Adjusted Monetary Base change at an annual rate Real Treasury Yield Curve Week Ending Friday: // /7/7 //7 1-1 1-7 7 1 y 7y 1y y Reserve Market Rates 1 1 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate 7 7 Inflation-Indexed Treasury Yield Spreads Week Ending Friday: // /7/7 //7 1 y 7y 1y y Federal Reserve Bank of St Louis
Monetary Trends updated through /1/7 MZM and M1 change from year ago 1 1 MZM M1 - -1 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 M change from year ago 1 1-9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 M* change from year ago 1 1-9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 *See table of contents for changes to the series Monetary Services Index - M** change from year ago 1 1-9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 **We will not update the MSI series until we revise the code to accomodate the discontinuation of M Federal Reserve Bank of St Louis
updated through /1/7 Monetary Trends Adjusted Monetary Base change from year ago 1 1-9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Domestic Nonfinancial Debt change from year ago 1 1 Total - Federal -1 1999 1 1999 1 7 Currency Held by the Nonbank Public change from year ago 1 1 7 7 Time Deposits* change from year ago Large Denomination 1 1 - -1 Small Denomination -1 7 7 *See table of contents for changes to the series Checkable and Savings Deposits change from year ago 1 Savings 1 Checkable - -1-1 7 7 Money Market Mutual Fund Shares change from year ago 1 Institutional Funds -1 Retail Funds - 7 7 Repurchase Agreements and Eurodollars* Billions of dollars Billions of dollars Repos (left) Eurodollars (right) 7 *See table of contents for changes to these series Federal Reserve Bank of St Louis
Monetary Trends updated through /1/7 M1 change at an annual rate 1-1 - - 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 *Actual values for September and October 1 are 7 and - percent rate, respectively MZM change at an annual rate 1-1 - 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 *Actual value for September 1 is 91 percent rate M change at an annual rate 1-1 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 *Actual value for September 1 is 9 percent rate M* change at an annual rate 1-1 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 *See table of contents for changes to the series Federal Reserve Bank of St Louis
updated through /1/7 Monetary Trends Adjusted and Required Reserves Billions of dollars 1 1 Required Adjusted 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Total Borrowings, nsa Billions of dollars Excess Reserves plus RCB Contracts Billions of dollars 1 1 1 7 1 7 *Actual value for September 1 is $ billion 1 7 1 7 *Actual value for September 1 is $ billion Nonfinancial Commercial Paper change from year ago - - - 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 As of April 1,, the Federal Reserve Board made major changes to its commercial paper calculations 7 For more information, please refer to http://wwwfederalreservegov/releases/cp/abouthtm Consumer Credit change from year ago 1 1 - -1 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Federal Reserve Bank of St Louis 7
Monetary Trends updated through /1/7 Inflation and 1-Year-Ahead Inflation Expectations 1 Humphrey-Hawkins CPI Inflation Range Federal Reserve Bank of Philadelphia CPI Inflation University of Michigan 9 91 9 9 9 9 9 97 9 99 1 7 The shaded region shows the Humphrey-Hawkins CPI inflation range Beginning in January, the Humphrey-Hawkins inflation range was reported using the PCE price index and therefore is not shown on this graph See notes on page 19 Treasury Security Yield Spreads Yield to maturity 1-Year less -Month T-Bill 1-Year less -Year Note -Year less -Month T-Bill - 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Real Interest Rates, Real rate = Nominal rate less year-over-year CPI inflation 1-Year Treasury Yield Federal Funds Rate - - 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Federal Reserve Bank of St Louis
updated through //7 Monetary Trends Short-Term Interest Rates 1 9-Day Commercial Paper 1 1 Prime Rate -Month Treasury Yield 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Long-Term Interest Rates 1 11 9 Conventional Mortgage 7 Corporate Aaa 1-Year Treasury Yield 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Long-Term Interest Rates 7 Corporate Baa 1-Year Treasury Yield 7 7 Short-Term Interest Rates 1 9-Day Commercial Paper -Month Treasury Yield 7 7 *9-Day Commercial Paper data are not available for December, January, and July FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate 1 1 Intended Federal Funds Rate Discount Rate Primary Credit Rate 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Federal Reserve Bank of St Louis 9
Monetary Trends updated through /1/7 Federal Funds Rate and Inflation Targets 1 % % % 1% % Target Inflation Rates 9 Actual 199 1999 1 7 199 1999 1 7 Calculated federal funds rate is based on Taylor's rule See notes on page 19 Components of Taylor's Rule Actual and Potential Real GDP PCE Inflation Billions of chain-weighted dollars change from year ago 1 11 Potential 11 1 Actual 1 9 9 1 199 1999 1 7 199 1999 1 7 199 1999 1 7 199 1999 1 7 Monetary Base Growth* and Inflation Targets 1 Actual 9 Target Inflation Rates % 1% % % % 199 1999 1 7 9 99 1 7 *Modified for the effects of sweeps programs on reserve demand Calculated base growth is based on McCallum's rule Actual base growth is percent change from year ago See notes on page 19 Monetary Base Velocity Growth Components of McCallum's Rule 1-Year Moving Average Real Output Growth 1-Year Moving Average - -Year Moving Average 1-Year Moving Average - 199 1999 1 7 9 99 1 7-199 1999 1 7 9 99 1 7 1 Federal Reserve Bank of St Louis
updated through //7 Implied One-Year Forward Rates Week Ending: // /7/7 //7, daily data May 7 Jul 7 Jun 7 Monetary Trends Rates on -Month Eurodollar Futures 1 y y y 7y 1y / / /9 /1 / / /7 /1 /1 / Rates on Selected Federal Funds Futures Contracts, daily data Jul 7 May 7 Jun 7 Rates on Federal Funds Futures on Selected Dates /1/7 /11/7 1 1 /1/7 / / /1 / /7 / /11 /1 / /1 May Jun Jul Aug Sep Oct Contract Month Inflation-Indexed Treasury Securities Weekly data Inflation-Indexed Treasury Yield Spreads Weekly data 1 1 1 Maturity 7 Note: Yields are inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Notes, weekly data US 1 1 1 Horizon 7 Note: Yield spread is between nominal and inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Yield Spreads, weekly data UK US 1 UK France 1 France 7 7 7 7 Federal Reserve Bank of St Louis 11
Monetary Trends updated through /1/7 Velocity Nominal GDP/MZM, Nominal GDP/M (Ratio Scale) 7 MZM M 17 1 9 91 9 9 9 9 9 97 9 99 1 7 19 11 11 1 119 17 119 11 1 1 11 197 11 17 171 17 1 1717 17 Interest Rates 1 -Month T-Bill M Own MZM Own 9 91 9 9 9 9 9 97 9 99 1 7 19 11 11 1 119 17 119 11 1 1 11 197 11 17 171 17 1 1717 17 MZM Velocity and Interest Rate Spread Ratio Scale M Velocity and Interest Rate Spread Ratio Scale Velocity = Nominal GDP / MZM 1 197Q1 to 199Q 199Q1 to present Velocity = Nominal GDP / M 17 1 1 197Q1 to 199Q 199Q1 to present 1 7 9 1 11 Interest Rate Spread = -Month T-Bill less MZM Own Rate 1 1 Interest Rate Spread = -Month T-Bill less M Own Rate 1 Federal Reserve Bank of St Louis
updated through /1/7 Monetary Trends Gross Domestic Product change from year ago 1 1 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Dashed lines indicate 1-year moving averages Real Gross Domestic Product change from year ago 1 1-9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Dashed lines indicate 1-year moving averages Gross Domestic Product Price Index change from year ago 1 1 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Dashed lines indicate 1-year moving averages M change from year ago 1 1 9 91 9 9 9 9 9 97 9 99 1 7 199 1991 199 199 199 199 199 1997 199 1999 1 7 Dashed lines indicate 1-year moving averages Federal Reserve Bank of St Louis 1
Monetary Trends updated through /1/7 Bank Credit change from year ago 1 1 199 1999 1 7 199 1999 1 7 Investment Securities in Bank Credit at Commercial Banks change from year ago 1 1-199 1999 1 7 199 1999 1 7 Total Loans and Leases in Bank Credit at Commercial Banks change from year ago 1 1-199 1999 1 7 199 1999 1 7 Commercial and Industrial Loans at Commercial Banks change from year ago 1 1 - -1 199 1999 1 7 199 1999 1 7 1 Federal Reserve Bank of St Louis
updated through /1/7 Monetary Trends Standard & Poor's 1 1 1 1 Composite Index (left) Price/Earnings Ratio (right) 1 9 91 9 9 9 9 9 97 9 99 1 7 1 Recent Inflation and Long-Term Interest Rates United States Canada France Germany Italy Japan United Kingdom Consumer Price Long-Term Inflation Rates Government Bond Rates change from year ago Q Q Q 7Q1 Jan7 Feb7 Mar7 Apr7 99 19 7 7 9 17 1 1 1 9 1 19 1 1 11 7 1 1 1 11 17 9 1 17 1 17 1 7 17-1 171 17 1 1 71 9 1 97 Inflation and Long-Term Interest Rate Differentials Canada Canada UK - Germany Germany - UK Japan Japan Inflation differential = Foreign inflation less US inflation Long-term rate differential = Foreign rate less US rate - 1/1/ 1/1/ 1/1/ 1/1/7 7 1/1/ - 1/1/ 1/1/ 1/1/ 1/1/7 7 1/1/ Federal Reserve Bank of St Louis 1
Monetary Trends updated through /1/7 Money Stock M1 MZM M M* Bank Credit Adjusted Monetary Base Reserves MSI M** 119 999 9 99 979 19 9 179 9 771 17 799 91 119 1 7 9 971 99 7771 99 97 17179 7 7 9777 7 1 9 9 17 99 19 177 797 9 1 1 1 9 9 999 79 97 9 1 71 9 97 719 9 1 17 71 9 999 71 7 9 7 17 197 99 11 7 19 991 7 1 1791 919 79 71179 9 9 19 9 7991 777 7 97 197 79 7 9 979 1 7177 97 7 9 91 7 1 177 7911 71 9 1 91 Apr 179 9 999 717 1 977 May 171 9 7 91 719 997 91 Jun 19 71 17 979 71 9 Jul 1 7719 1 97 7171 9 97 7 Aug 171 797 71 99 7 79 9 79 Sep 17971 779 991 717 11 9771 Oct 177 7 119 7971 111 97 79 Nov 1779 17 19 179 7 1 9 Dec 17 9 79 11 71 19 9 7 Jan 179 117 717 179 7 9 Feb 171 99 71 19 779 1 99 9 Mar 17 9 71 77179 1 971 Apr 11 9 719 77 1 9 May 17 91 7999 797 79 99 Jun 17 99 1 7911 797 99 Jul 171171 9797 1 79 91 9 Aug 1717 79 77 1 1 9 Sep 197 7711 9 11 9 Oct 19 791 91 199 71 9919 Nov 179 719 911 1 97 Dec 1197 71 77 117 77 9179 7 Jan 17177 77 71 9 97 Feb 199 77 71117 9 71 91 Mar 11 79 717 77 1 99 Apr 179 71 71 19 99 9 Note: All values are given in billions of dollars *See table of contents for changes to the series **We will not update the MSI series until we revise the code to accommodate the discontinuation of M 1 Federal Reserve Bank of St Louis
updated through /1/7 Monetary Trends Federal Primary Prime -mo Treasury Yields Corporate Municipal Conventional Funds Credit Rate Rate CDs -mo -yr 1-yr Aaa Bonds Aaa Bonds Mortgage 17 17 1 1 1 9 7 11 11 1 11 1 11 7 1 1 1 7 7 1 19 19 1 1 9 9 9 9 79 1 77 79 9 1 1 1 7 7 1 7 9 91 91 9 7 1 1 1 7 7 9 1 9 7 9 97 97 91 7 9 1 7 7 7 9 9 91 9 79 1 9 7 9 9 7 9 1 9 7 1 1 1 91 Apr 79 7 7 9 79 1 May 9 9 9 7 1 1 7 Jun 1 1 9 9 Jul 7 9 91 1 1 7 Aug 77 9 Sep 9 9 7 9 9 1 77 Oct 7 7 7 1 79 9 9 7 Nov 7 1 97 Dec 1 1 71 97 9 7 7 7 Jan 9 7 9 7 1 Feb 9 7 7 7 Mar 9 7 7 7 9 Apr 79 7 77 7 9 99 1 May 9 9 79 1 97 11 9 Jun 99 9 9 11 9 Jul 7 9 1 7 Aug 9 1 Sep 9 9 7 1 7 Oct 7 7 1 91 Nov 7 1 Dec 97 7 1 7 Jan 11 79 7 9 Feb 1 1 7 7 9 9 9 Mar 1 1 Apr 1 1 9 7 99 1 Note: All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17
Monetary Trends updated through /1/7 M1 MZM M M* change at an annual rate 91 17 77 79 7 9 7 97 9 97 7 9 1-9 7 7 9 19 1 9 71-99 1 1 9 7-9 9-79 9 7 1 - Apr -117 1 97 May - Jun 117 19 1 7 Jul -1 Aug 1 1 Sep 7 1 Oct - 979 Nov 9 19 7 Dec - 19 99 Jan 9 7 797 19 Feb - 19 Mar 79 Apr -19 May 7 191 Jun -11 1 Jul - 7 1 Aug 11 Sep - Oct 7 11 91 Nov 1 71 99 Dec -1 1 777 7 Jan 9 79 1 Feb -1 97 91 Mar 7 1 9 Apr 7 19 1 *See table of contents for changes to the series 1 Federal Reserve Bank of St Louis
Monetary Trends Definitions M1: The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the US Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal Reserve float MZM (money, zero maturity): M minus small-denomination time deposits, plus institutional money market mutual funds (that is, those included in M but excluded from M) The label MZM was coined by William Poole (1991); the aggregate itself was proposed earlier by Motley (19) M: M1 plus savings deposits (including money market deposit accounts) and small-denomination (under $1,) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments under $,), net of retirement accounts M: M plus large-denomination ($1, or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank US addresses held at foreign offices of US banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $, or more) Bank Credit: All loans, leases, and securities held by commercial banks Domestic Nonfinancial Debt: Total credit market liabilities of the US Treasury, federally sponsored agencies, state and local governments, households, and nonfinancial firms End-of-period basis Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the US Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories This series is a spliced chain index; see Anderson and Rasche (199a,b, 1, ) Adjusted Reserves: The sum of vault cash and Federal Reserve Bank deposits held by depository institutions and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories This spliced chain index is numerically larger than the Board of Governors measure, which excludes vault cash not used to satisfy statutory reserve requirements and Federal Reserve Bank deposits used to satisfy required clearing balance contracts; see Anderson and Rasche (199a, 1, ) Monetary Services Index: An index that measures the flow of monetary services received by households and firms from their holdings of liquid assets; see Anderson, Jones, and Nesmith (1997) Indexes are shown for the assets included in M, with additional data at researchstlouisfedorg/msi/indexhtml Note: M1, M, M, Bank Credit, and Domestic Nonfinancial Debt are constructed and published by the Board of Governors of the Federal Reserve System For details, see Statistical Supplement to the Federal Reserve Bulletin, tables 11 and 1 MZM, Adjusted Monetary Base, Adjusted Reserves, and Monetary Services Index are constructed and published by the Research Division of the Federal Reserve Bank of St Louis Notes Page : Readers are cautioned that, since early 199, the level and growth of M1 have been depressed by retail sweep programs that reclassify transactions deposits (demand deposits and other checkable deposits) as savings deposits overnight, thereby reducing banks required reserves; see Anderson and Rasche (1) and researchstlouisfedorg/aggreg/swdatahtml Primary Credit Rate, Discount Rate, and Intended Federal Funds Rate shown in the chart Reserve Market Rates are plotted as of the date of the change, while the Effective Federal Funds Rate is plotted as of the end of the month Interest rates in the table are monthly averages from the Board of Governors H1 Statistical Release The Treasury Yield Curve and Real Treasury Yield Curve show constant maturity yields calculated by the US Treasury for securities, 7, 1, and years to maturity Inflation-Indexed Treasury Yield Spreads are a measure of inflation compensation at those horizons, and it is simply the nominal constant maturity yield less the real constant maturity yield Daily data and descriptions are available at researchstlouisfedorg/fred/ See also Statistical Supplement to the Federal Reserve Bulletin, table 1 The - year constant maturity series was discontinued by the Treasury as of February 1, Page : Checkable Deposits is the sum of demand and other checkable deposits Savings Deposits is the sum of money market deposit accounts and passbook and statement savings Time Deposits have a minimum initial maturity of 7 days Large Time Deposits are deposits of $1, or more Retail and Institutional Money Market Mutual Funds are as included in M and the non-m component of M, respectively Page 7: Excess Reserves plus RCB (Required Clearing Balance) Contracts equals the amount of deposits at Federal Reserve Banks held by depository institutions but not applied to satisfy statutory reserve requirements (This measure excludes the vault cash held by depository institutions that is not applied to satisfy statutory reserve requirements) Consumer Credit includes most short- and intermediate-term credit extended to individuals See Statistical Supplement to the Federal Reserve Bulletin, table 1 Page : Inflation Expectations measures include the quarterly Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, the monthly University of Michigan Survey Research Center s Surveys of Consumers, and the annual Federal Open Market Committee (FOMC) range as reported to the Congress in the February testimony that accompanies the Monetary Policy Report to the Congress Beginning February, the FOMC began using the personal consumption expenditures (PCE) price index to report its inflation range; the FOMC then switched to the PCE chain-type price index excluding food and energy prices ( core ) beginning July Accordingly, neither are shown on this graph CPI Inflation is the percentage change from a year ago in the consumer price index for all urban consumers Real Interest Rates are ex post measures, equal to nominal rates minus year-over-year CPI inflation Page 9: FOMC Intended Federal Funds Rate is the level (or midpoint of the range, if applicable) of the federal funds rate that the staff of the FOMC expected to be consistent with the desired degree of pressure on bank reserve positions In recent years, the FOMC has set an explicit target for the federal funds rate Page 1: Federal Funds Rate and Inflation Targets shows the observed federal funds rate, quarterly, and the level of the funds rate implied by applying Taylor s (199) equation f * t = + π t 1 + (π t 1 π * )/ + 1 (y t 1 y P t 1 )/ to five alternative target inflation rates, π * =, 1,,, percent, where f * t is the implied federal funds rate, π t 1 is the previous period s inflation rate (PCE) measured on a year-over-year basis, y t 1 is the log of the previous period s level of real gross domestic product (GDP), and y P t 1 is the log of an estimate of the previous period s level of potential output Potential Real GDP is as estimated by the Congressional Budget Office Monetary Base Growth and Inflation Targets shows the quarterly growth of the adjusted monetary base (modified to include an estimate of the effect of sweep programs) implied by applying McCallum s (19, 199) equation ΔMB * t = π * + (1-year moving average growth of real GDP) (-year moving average of base velocity growth) to five alternative target inflation rates, π * * =, 1,,, percent, where ΔMB t is the implied growth rate of the adjusted monetary base The 1-year moving average growth of real GDP for a quarter t is calculated as the average quarterly growth during the previous quarters, at an annual rate, by the formula ((y t y t )/), where y t is the log of real GDP The -year moving average of base velocity growth is calculated similarly To adjust the monetary base for the effect of retail-deposit sweep programs, we add to the monetary base an amount equal to 1 percent of the total amount swept, as estimated by the Federal Reserve Board staff These estimates are imprecise, at best Sweep program data are found at researchstlouisfedorg/aggreg/swdatahtml Federal Reserve Bank of St Louis 19
Monetary Trends Page 11: Implied One-Year Forward Rates are calculated by this Bank from Treasury constant maturity yields Yields to maturity, R(m), for securities with m = 1,, 1 years to maturity are obtained by linear interpolation between reported yields These yields are smoothed by fitting the regression suggested by Nelson and Siegel (197), R(m) = a + (a 1 + a )(1 e m/ )/(m/) a e m/, and forward rates are calculated from these smoothed yields using equation (a) in table 11 of Shiller (199), f(m) = [D(m)R(m) D(m 1)] / [D(m) D(m 1)], where duration is approximated as D(m) = (1 e R(m) m )/R(m) These rates are linear approximations to the true instantaneous forward rates; see Shiller (199) For a discussion of the use of forward rates as indicators of inflation expectations, see Sharpe (1997) Rates on -Month Eurodollar Futures and Rates on Selected Federal Funds Futures Contracts trace through time the yield on three specific contracts Rates on Federal Funds Futures on Selected Dates displays a single day s snapshot of yields for contracts expiring in the months shown on the horizontal axis Inflation-Indexed Treasury Securities and Yield Spreads are those plotted on page Inflation-Indexed 1-Year Government Notes shows the yield of an inflation-indexed note that is scheduled to mature in approximately (but not greater than) 1 years The current French note has a maturity date of 7//1, the current UK note has a maturity date of /1/1, and the current US note has a maturity date of 1/1/17 Inflation-Indexed Treasury Yield Spreads and Inflation- Indexed 1-Year Government Yield Spreads equal the difference between the yields on the most recently issued inflation-indexed securities and the unadjusted security yields of similar maturity Page 1: Velocity (for MZM and M) equals the ratio of GDP, measured in current dollars, to the level of the monetary aggregate MZM and M Own Rates are weighted averages of the rates received by households and firms on the assets included in the aggregates Prior to 19, the -month T-bill rates are secondary market yields From 19 forward, rates are -month constant maturity yields Page 1: Real Gross Domestic Product is GDP as measured in chained dollars The Gross Domestic Product Price Index is the implicit price deflator for GDP, which is defined by the Bureau of Economic Analysis, US Depart - ment of Commerce, as the ratio of GDP measured in current dollars to GDP measured in chained dollars Page 1: Investment Securities are all securities held by commercial banks in both investment and trading accounts Page 1: Inflation Rate Differentials are the differences between the foreign consumer price inflation rates and year-over-year changes in the US all-items Consumer Price Index Page 17: Treasury Yields are Treasury constant maturities as reported in the Board of Governors of the Federal Reserve System s H1 release Sources Agence France Trésor: French note yields Bank of Canada: Canadian note yields Bank of England: UK note yields Board of Governors of the Federal Reserve System: Monetary aggregates and components: H release Bank credit and components: H release Consumer credit: G19 release Required reserves, excess reserves, clearing balance contracts, and discount window borrowing: H1 and H releases Interest rates: H1 release Nonfinancial commercial paper: Board of Governors website Nonfinancial debt: Z1 release M own rate Bureau of Economic Analysis: GDP Bureau of Labor Statistics: CPI Chicago Board of Trade: Federal funds futures contract Chicago Mercantile Exchange: Eurodollar futures Congressional Budget Office: Potential real GDP Federal Reserve Bank of Philadelphia: Survey of Professional Forecasters inflation expectations Federal Reserve Bank of St Louis: Adjusted monetary base and adjusted reserves, monetary services index, MZM own rate, one-year forward rates Organization for Economic Cooperation and Development: International interest and inflation rates Standard & Poor s: Stock price-earnings ratio, stock price composite index University of Michigan Survey Research Center: Median expected price change US Department of the Treasury: US security yields References Anderson, Richard G and Robert H Rasche (199a) A Revised Measure of the St Louis Adjusted Monetary Base, Federal Reserve Bank of St Louis Review, March/April, 7(), pp -1* and (199b) Measuring the Adjusted Monetary Base in an Era of Financial Change, Federal Reserve Bank of St Louis Review, November/ December, 7(), pp -7* and (1) Retail Sweep Programs and Bank Reserves, 199-1999, Federal Reserve Bank of St Louis Review, January/February, (1), pp 1-7* and, with Jeffrey Loesel () A Reconstruction of the Federal Reserve Bank of St Louis Adjusted Monetary Base and Reserves, Federal Reserve Bank of St Louis Review, September/October, (), pp 9-7*, Barry E Jones and Travis D Nesmith (1997) Special Report: The Monetary Services Indexes Project of the Federal Reserve Bank of St Louis, Federal Reserve Bank of St Louis Review, January/February, 79(1), pp 1-* McCallum, Bennett T (19) Robustness Properties of a Monetary Policy Rule, Carnegie-Rochester Conference Series on Public Policy, vol 9, pp 17- (199) Specification and Analysis of a Monetary Policy Rule for Japan, Bank of Japan Monetary and Economic Studies, November, pp 1- Motley, Brian (19) Should M Be Redefined? Federal Reserve Bank of San Francisco Economic Review, Winter, pp -1 Nelson, Charles R and Andrew F Siegel (197) Parsimonious Modeling of Yield Curves, Journal of Business, October, pp 7-9 Poole, William (1991) Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, US House of Representatives, November, 1991 Government Printing Office, Serial No 1- Sharpe, William F (1997) Macro-Investment Analysis, on-line textbook available at wwwstanfordedu/~wfsharpe/mia/miahtm Shiller, Robert (199) The Term Structure of Interest Rates, Handbook of Monetary Economics, vol 1, B Friedman and F Hahn, eds, pp 7-7 Taylor, John B (199) Discretion versus Policy Rules in Practice, Carnegie- Rochester Conference Series on Public Policy, vol 9, pp 19-1 Note: *Available on the Internet at researchstlouisfedorg/publications/review/ Federal Reserve Bank of St Louis