MonetaryTrends April 9 Resolving a Banking Crisis, the Nordic Way Economic historians have long noted a high correlation between financial crises and downturns in economic activity One of the more widely discussed cases during the past two decades is the Nordic banking crisis during the early 199s Norway, Finland, and Sweden all experienced severe banking difficulties Although details differ, there was a common two stage sequence in each country: rapidly increasing economic growth accompanied by financial liberalization and the introduction of new financial instruments, followed by sharp recession and financial crisis Wide - spread losses affected the residential and commercial real estate, retail, and service sectors, among others Some losses were exacerbated by foreign currency exposure Honkapohja (9) cites deregulation of the financial system in the 198s as the root of both the economic downturn and the financial crisis During the 198s, attractive interest rates in the Nordic attracted capital inflows; in their then-recently deregulated markets, credit expanded in response to market forces Unfortunately, rules and practices governing safe and prudential banking had not been updated when banking was deregulated; rather, the rules of the 19s, adopted during a period of tight regulation, continued The result was an increase in information asymmetry the now all-too-familiar historical precursor to financial crises amplified by international capital inflows If international investors enter a country with imperfect information, or if the rate of growth changes, they may seek to withdraw capital Honkapohja cites Denmark in counterpoint: The essential feature of Denmark was a much smaller level of asymmetric information: Prudential supervision, disclosure rules, and capital adequacy requirements for Danish banks were made stricter than the other Nordic banks Honkapohja offers some recommendations, based on the Nordic experience, for policy responses to financial crises: First, build a bipartisan political consensus to support the actions needed to maintain confidence in the banking system This includes establishing a new crisis resolution agency to handle both communication with the public and bank restructuring If successful, such an agency can reduce conflicts of interest or turf fights among existing agencies while providing capital and liquidity to banks, even if another agency (such as the central bank) provides funding This agency may also be well-placed to moderate inevitable attempts by bank owners to capture for themselves a greater share of the largesse actions that can undermine public support for crisis resolution Second, seek private solutions, including mergers and acquisitions; avoid liquidations when possible Third, be very transparent regarding support actions In the Nordic case, public confidence was sustained and bank runs avoided (absent government deposit insurance) through a highly visible public government guarantee for the obligations of banks, including both deposits and debt securities While debt holders were protected, equity holders suffered decreases in value but were not automatically wiped out when the governments provided support An additional element of the Nordic resolution was openly accounting for all expected losses and write-downs, for all banks, at an early stage For many assets, especially real estate, this is a difficult problem; Ingves and Lind (199) note that in Sweden this was successfully solved the new lower adjusted asset values subsequently earned a rate of return close to the market rate They also emphasize the unpleasant truth about banking crisis resolutions that there will be losses and that the loss has to be covered in one way or another Besides guiding public assistance, honest accounting may instill confidence in private investors who perhaps will recapitalize potentially viable banks Of the six large banks in Sweden, for example, three received public assistance and three did not; the latter were able to raise necessary capital privately Society-wide benefits also might accrue if the fire-sale disposal of assets can be avoided and public confidence in the financial system can be sustained The Nordic bank resolution is widely regarded as among the most successful in history In all three countries, the final net cost of assistance to the banks (net of liquidation of assets and including appreciation in the value of government shares) was far smaller than the initial cost for Sweden and Norway, near zero, for Finland, an eventual percent of 1997 GDP versus initial outlays of 9 percent of GDP Richard G Anderson Honkapohja, Seppo The 199 s Financial Crises in Nordic Countries Bank of Finland Research Discussion Papers No, 9 Ingves, Stefan and Lind, Göran The Management of the Bank Crisis in Retrospect Sveriges Riksbank Quarterly Review, 199, (1), pp -18 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 8 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 18 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) -89
updated through /1/9 Monetary Trends M and MZM Billions of dollars 9 9 8 MZM Treasury Yield Curve Week Ending Friday: /8/8 /7/9 /7/9 7 8 7 7 M 7 8 9 7 8 9 1 1 y 7y 1y y Adjusted Monetary Base change at an annual rate Real Treasury Yield Curve Week Ending Friday: /8/8 /7/9 /7/9 1 1-1 - 7 8 9 7 8 9 1 y 7y 1y y Reserve Market Rates 8 7 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate Inflation-Indexed Treasury Yield Spreads Week Ending Friday: /8/8 /7/9 /7/9 1 1 7 8 9 7 8 9 1 Data available as of January 9 Note: Effective December 1, 8, FOMC reports the intended Federal Funds Rate as a range y 7y 1y y Federal Reserve Bank of St Louis
Monetary Trends updated through /17/9 MZM and M1 change from year ago 1 1 MZM M1 - -1 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 M change from year ago 1 1-9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 M* change from year ago 1 1-91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 *See table of contents for changes to the series Monetary Services Index - M** change from year ago 1 1-91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 **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 /17/9 Monetary Trends Adjusted Monetary Base change from year ago 1 1 8-9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 Domestic Nonfinancial Debt change from year ago 1 1 Total Currency Held by the Nonbank Public change from year ago 1 1 - Federal -1 1 7 8 1 7 8 9 7 8 9 7 8 9 1 Time Deposits* change from year ago Large Denomination Small Denomination 1 1-7 8 9 7 8 9 1 *See table of contents for changes to the series Checkable and Savings Deposits change from year ago Checkable Savings 1-1 7 8 9 7 8 9 1 Money Market Mutual Fund Shares change from year ago Institutional Funds 1 Retail Funds -1-7 8 9 7 8 9 1 Repurchase Agreements and Eurodollars* Billions of dollars Billions of dollars Repos (left) Eurodollars (right) 7 8 *See table of contents for changes to these series Federal Reserve Bank of St Louis
Monetary Trends updated through /17/9 M1 change at an annual rate 8 - - - 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 MZM change at an annual rate 1-1 - 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 M change at an annual rate 1-1 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 M* change at an annual rate 1-1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 *See table of contents for changes to the series Federal Reserve Bank of St Louis
updated through /17/9 Monetary Trends Adjusted and Required Reserves Billions of dollars 9 Required Adjusted 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 Total Borrowings, nsa Billions of dollars 1 1 7 8 9 7 8 9 1 * Data exclude term auction credit Excess Reserves plus RCB Contracts Billions of dollars 1 8 7 8 9 7 8 9 1 Nonfinancial Commercial Paper change from year ago - - - 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 As of April 1,, the Federal Reserve Board made major changes to its commercial paper calculations 7 8 9 1 For more information, please refer to http://wwwfederalreservegov/releases/cp/abouthtm Consumer Credit change from year ago 1 1 - -1 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 Federal Reserve Bank of St Louis 7
Monetary Trends updated through //9 CPI Inflation and 1-Year-Ahead CPI Inflation Expectations Humphrey-Hawkins CPI Inflation Range 1-1 CPI Inflation University of Michigan Federal Reserve Bank of Philadelphia 9 9 9 9 9 97 98 99 1 7 8 9 1 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 1-Year Ahead PCE Inflation Expectations and Realized Inflation 8 Realized Expected 7 7 8 8 9 9 See the notes section for an explanation of the chart Treasury Security Yield Spreads Yield to maturity Real Interest Rates, Real rate = Nominal rate less year-over-year CPI inflation 1-Year less -Month T-Bill 1-Year Treasury Yield - 1-Year less -Year Note -Year less -Month T-Bill 1 7 8 9 1 7 8 9 1 - Federal Funds Rate - 1 7 8 9 1 7 8 9 1 8 Federal Reserve Bank of St Louis
updated through //9 Monetary Trends Short-Term Interest Rates 1 1 8 Prime Rate 9-Day Commercial Paper -Month Treasury Yield - 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 Long-Term Interest Rates 1 8 Conventional Mortgage Corporate Aaa 1-Year Treasury Yield 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 Long-Term Interest Rates 1 Short-Term Interest Rates 9-Day Commercial Paper 8 Corporate Baa -Month Treasury Yield 1-Year Treasury Yield 7 8 9 7 8 9 1-7 8 9 7 8 9 1 *9-Day Commercial Paper data are not available for December, January, and July FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate 8 Intended Federal Funds Rate Discount Rate Primary Credit Rate 9 9 9 9 9 97 98 99 1 7 8 9 199 199 199 199 199 1997 1998 1999 1 7 8 9 1 Data available as of January 9 Federal Reserve Bank of St Louis 9
Monetary Trends updated through //9 Federal Funds Rate and Inflation Targets 1 % % % 1% % Target Inflation Rates 9 Actual 1999 1 7 8 1999 1 7 8 9 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 1 Potential 11 11 1 Actual 1 9 1 9 1999 1 7 8 1999 1 7 8 1999 1 7 8 9 1999 1 7 8 9 Monetary Base Growth* and Inflation Targets 1 1 Actual Target Inflation Rates % 1% % % % 1999 1 7 8 99 1 7 8 9 *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 -Year Moving Average 1-Year Moving Average Real Output Growth 8 1-Year Moving Average 1-Year Moving Average - 1999 1 7 8 99 1 7 8 9-1999 1 7 8 99 1 7 8 9 1 Federal Reserve Bank of St Louis
updated through /1/9 Implied One-Year Forward Rates 7 1 Week Ending: /8/8 /7/9 /7/9 y y y 7y 1y Monetary Trends Rates on -Month Eurodollar Futures, daily data 1 1 May 9 Apr 9 19 Mar 9 11 1 9 1/ / /9 /1 / / /9 /1 / / Rates on Selected Federal Funds Futures Contracts, daily data 9 1 17 May 9 Mar 9 Apr 9 1/ / /9 /1 / / /9 /1 / / Rates on Federal Funds Futures on Selected Dates 7 7 17 /1/9 1/1/9 /1/9 Mar Apr May Jun Jul Aug Contract Month Inflation-Indexed Treasury Securities Weekly data Inflation-Indexed Treasury Yield Spreads Weekly data 7 17 1 1 7 1 Maturity 8 9 1 Note: Yields are inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Notes, weekly data 1 UK France US 7 8 9 7 8 9 1-7 1-7 1 Horizon 8 9 1 Note: Yield spread is between nominal and inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Yield Spreads, weekly data US UK France - 7 8 9 7 8 9 1 Federal Reserve Bank of St Louis 11
Monetary Trends updated through //9 Velocity Nominal GDP/MZM, Nominal GDP/M (Ratio Scale) 7 MZM M 17 1 91 9 9 9 9 9 97 98 99 1 7 8 11 1188 1 119 178 119 11 188 1 11 197 11 17 171 17 18 1717 17 17898 Interest Rates 1 8 -Month T-Bill M Own MZM Own 91 9 9 9 9 9 97 98 99 1 7 8 11 1188 1 119 178 119 11 188 1 11 197 11 17 171 17 18 1717 17 17898 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 8 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 //9 Monetary Trends Gross Domestic Product change from year ago 1 7 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages Real Gross Domestic Product change from year ago - - 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages Gross Domestic Product Price Index change from year ago 1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages M change from year ago 1 9 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages Federal Reserve Bank of St Louis 1
Monetary Trends updated through /1/9 Bank Credit change from year ago 1 1 1 7 8 9 1 7 8 9 1 Investment Securities in Bank Credit at Commercial Banks change from year ago 1 1-1 7 8 9 1 7 8 9 1 Total Loans and Leases in Bank Credit at Commercial Banks change from year ago 1 1-1 7 8 9 1 7 8 9 1 Commercial and Industrial Loans at Commercial Banks change from year ago 1 1 - -1 1 7 8 9 1 7 8 9 1 1 Federal Reserve Bank of St Louis
updated through /19/9 Monetary Trends Standard & Poor's 1 8 1 1 1 Composite Index (left) 8 Price/Earnings Ratio (right) 18 9 9 9 9 9 97 98 99 1 7 8 9 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 8Q1 8Q 8Q 8Q Nov8 Dec8 Jan9 Feb9 7 1 87 178 19 9 8 97 9 17 98 9 9 7 1 7 1 7 97 8 7 7 1 1 1 17 11 1 1 8 7 81 88 7 9 Inflation and Long-Term Interest Rate Differentials Germany UK UK Canada Japan - Germany Canada - Japan Inflation differential = Foreign inflation less US inflation Long-term rate differential = Foreign rate less US rate - 1/1/ 1/1/7 7 1/1/8 8 1/1/9 9 1/1/1-1/1/ 1/1/7 7 1/1/8 8 1/1/9 9 1/1/1 Federal Reserve Bank of St Louis 1
Monetary Trends updated through /17/9 Money Stock M1 MZM M M* Bank Credit Adjusted Monetary Base Reserves MSI M** 1 98 8 9718 7778 919 987 1717 971 197 97877 77 88 9 9 178 988 87 177 7917 89 991 7 197 719 7 87 879 9 8 18 881 77788 999 1971 1 1 181 878 71 79 8 99 18 91 791 788989 887 98 1 7 89 8 81 989 1879 718 9818 898 887 9 7 1 191 7791 7878 878 89 91 17 78 7187 877 89919 98 179 7791 78 8877 87 98 17 89 7887 91798 88 991 8 1 17798 818 777 918 819 917 177 8 7 911 89 9 1181 8797 77779 9788 8979 11779 1171 898 819 99988 17 1 7 Feb 117 771 7711 8911 878 9 Mar 181 77 711171 8 8817 978 Apr 17881 7977 717 891 889 9 May 17979 7 71891 89 891 977 Jun 111 717 717 81 81181 999 Jul 18 78888 797 87 8188 9 Aug 181 7789 787 887 88 98 Sep 17 781 7 898 81 91 Oct 1718 797 78 979 89 9 Nov 18 88 787 9 871 977 Dec 1 81 71797 97 8787 9179 8 Jan 1887 818799 71 9989 811 97 Feb 1717 8811 799 99977 89 919 Mar 1791 81 779 978 871 97 Apr 17 891 719971 9 8 971 May 1777 81 7787 98 8987 99 Jun 187 8899 781 9 87 98 Jul 117 879 7989 9 87 981 Aug 1919 879 7879 97 871 9 Sep 11 87887 7791 9789 918 198 Oct 171 88 791 9981 111 7 Nov 1 897 7977 99117 187 78 Dec 199 917 81 99187 19 89 9 Jan 171 991 81 989 1779 899 Feb 1877 9989 877 9798987 188 789 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 /1/9 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 1 1 1 78 7 8 1 19 19 1 1 9 9 8 8 9 9 79 1 8 77 79 9 1 1 7 8 8 7 7 1 8 19 9 9 97 19 7 8 1 7 7 8 7 9 9 91 9 79 18 8 98 7 89 8 9 87 9 8 1 8 9 8 7 1 8 1 1 8 8 91 8 87 7 8 8 1 7 7 9 818 1 7 7 7 7 7 8 1 18 7 1 9 17 9 88 9 8 7 1 7 89 9 19 1 8 1 1 11 8 18 8 87 7 Feb 8 1 1 7 7 9 9 9 Mar 8 8 1 88 1 Apr 8 1 1 9 7 99 18 May 8 1 87 9 7 7 Jun 8 7 1 79 Jul 8 9 8 7 7 Aug 1 8 9 7 79 7 Sep 9 8 99 7 8 Oct 7 77 8 1 8 Nov 9 7 97 1 1 Dec 8 7 7 1 1 9 1 8 Jan 9 8 98 8 8 1 7 1 7 Feb 98 17 19 7 9 Mar 1 79 18 18 1 1 97 Apr 8 9 8 11 8 9 May 198 17 9 88 7 Jun 7 189 8 1 8 Jul 1 79 1 87 1 7 Aug 79 17 7 89 8 Sep 181 9 11 9 1 Oct 97 181 9 18 81 8 Nov 9 1 19 11 1 8 9 Dec 1 8 1 177 17 17 9 Jan 1 1 1 11 Feb 11 17 87 7 1 Note: All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17
Monetary Trends updated through /17/9 M1 MZM M M* change at an annual rate 7 91 7 9 1 8 97 19 9 7-9 7 8 9 1 81 1 17 7 7-79 9-9 87 8 7 1 1 7 9 19 98 7-1 1 17 1 8 8 1 9 1 81 181 1 7 198 8 1 18 7 Feb - 9 11 Mar 187 9 Apr 9 1 8 May 8 1 77 Jun -1 87 8 Jul 18 11 1 Aug 1 198 8 Sep -19 197 7 Oct 79 191 9 Nov -8 1 1 Dec -188 98 8 Jan 8 118 79 Feb 99 11 Mar 1 199 978 Apr 979 8 May 79 81 Jun 88 9 18 Jul 1 77 791 Aug -81-199 -181 Sep 1 791 17 Oct 191 18 Nov 99 18 8 Dec 987 7 9 Jan -17 1 11 Feb -1 7 8 *See table of contents for changes to the series 18 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 (1988) 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 18, 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 8: 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 From 1991 to the present the source of the long-term PCE inflation expectations data is the Federal Reserve Bank of Philadelphia s Survey of Professional Forecasters Prior to 1991, the data were obtained from the Board of Governors of the Federal Reserve System Realized (actual) inflation is the annualized rate of change for the -quarter period that corresponds to the forecast horizon (the expectations measure) For example, in 19:Q1, annualized PCE inflation over the next quarters was expected to average 17 percent In actuality, the average annualized rate of change measured 8 percent from 19:Q1 to 197:Q1 Thus, the vertical distance between the two lines in the chart at any point is the forecast error 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 (1988, 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 Federal Reserve Bank of St Louis 19
Monetary Trends ((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 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 (1987), 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 8/1/1, and the current US note has a maturity date of 1/1/18 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 198, the -month T-bill rates are secondary market yields From 198 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: H8 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, 78(), pp -1* and (199b) Measuring the Adjusted Monetary Base in an Era of Financial Change, Federal Reserve Bank of St Louis Review, November/ December, 78(), pp -7* and (1) Retail Sweep Programs and Bank Reserves, 199-1999, Federal Reserve Bank of St Louis Review, January/February, 8(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, 8(), 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 1-8* McCallum, Bennett T (1988) 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 (1988) Should M Be Redefined? Federal Reserve Bank of San Francisco Economic Review, Winter, pp -1 Nelson, Charles R and Andrew F Siegel (1987) Parsimonious Modeling of Yield Curves, Journal of Business, October, pp 7-89 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 1-8 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