MonetaryTrends January 8 Can You Hear Me Now? On November 1, 7, the Federal Open Market Committee (FOMC) announced several changes designed to improve the accountability and public understanding of monetary policy making 1 These changes included increasing the frequency of the economic projections of the FOMC participants (governors and Reserve Bank presidents) from two to four times per year; extending the maximum projection horizon from two to three years; and quantifying, to the extent possible, the degree of uncertainty policymakers attach to their economic projections Increased transparency is one way to reduce the uncertainty that households, firms, and financial markets have about the current stance of monetary policy and its implications for future economic outcomes In his remarks describing these changes, Chairman Bernanke said that increased transparency benefits society and the economy in two important ways First, good communications are a prerequisite if central banks are to maintain the democratic legitimacy and independence that are essential to sound monetary policy making Second, central bank transparency increases the effectiveness of monetary policy and enhances economic and financial performance When the FOMC released its new economic projections on November, 7, economic and financial market participants tended to focus first on the revisions to the 7-8 projections that were published July 18, 7, in the Monetary Policy Report to the Congress The new projections indicated that FOMC policymakers had become modestly less optimistic about real GDP growth in 8 compared with three months earlier (the mid-point of the central tendency was reduced from percent to 1 percent), but their expectation for core PCE inflation in 8 was virtually unchanged from three months earlier (the mid-point of the central tendency is 18 percent) In view of the recent turbulence associated with developments in the housing and mortgage finance sector, the market s focus on the revisions to the near-term outlook is consistent with the FOMC s risk management strategy If, for example, the risk of weaker economic growth exceeds the risk of higher inflation (asymmetric risk), the appropriate policy gives more weight to a very damaging outcome that has a low probability than to a less damaging outcome with a greater probability Analysts then focused on the FOMC s projections for overall and core PCE inflation in 1 According to the central tendency, inflation whether measured by the PCE or core PCE is expected to be between 1 percent and 19 percent for the four quarters ending in 1:Q From 7 to 9, though, overall inflation is projected to slightly exceed, on average, core inflation Extending the projection horizon by one year is potentially an important innovation in the monetary policy communication process For one thing, it reinforces the fact that monetary policy is the main determinant of inflation over longer horizons Second, it also reinforces the fact that, over time, the overall inflation rate which households and firms care most about should be no different from the core inflation rate, which the FOMC uses as a measure of the underlying inflation rate This is because food and energy price shocks tend to be temporary Some economic analysts appear to have interpreted the mid-point of the 1 central tendency as the Committee s long-term inflation preference despite no explicit policy statement to that effect Nevertheless, if this interpretation persists, and if expectations are crucial for ensuring good macroeconomic outcomes, then the FOMC s longer-term inflation projection must be viewed as credible One way to achieve credibility is by ensuring that the three-yearahead projection errors are zero, on average Attaining this outcome may be made more difficult because (i) the composition of the FOMC may change over time and (ii) each member may have a different view of what an appropriate policy stance is Kevin L Kliesen 1 See wwwfederalreservegov/newsevents/press/monetary/7111ahtm See Federal Reserve Communications, at wwwfederalreservegov/newsevents/ speech/bernanke7111ahtm The central tendency removes the three highest and lowest projections See Alan Greenspan, Risk and Uncertainty in Monetary Policy, at wwwfederalreservegov/boarddocs/speeches//1/defaulthtm 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 1/9/8 Monetary Trends M and MZM Treasury Yield Curve Billions of dollars 8 797 77 77 7 97 7 7 M MZM Week Ending Friday: 1//7 1/7/7 7 1//8 7 97 7 7 8 7 y 7y 1y y Adjusted Monetary Base change at an annual rate 1-1 Real Treasury Yield Curve Week Ending Friday: 1//7 7 1/7/7 1//8 17 1 1-7 7 8 1 7 y 7y 1y y Reserve Market Rates 1 1 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate 7 7 8 Data available as of January 8 Federal Reserve Bank of St Louis Inflation-Indexed Treasury Yield Spreads Week Ending Friday: 1//7 1/7/7 1//8 1 y 7y 1y y
Monetary Trends updated through 1/1/7 MZM and M1 change from year ago 1 1 MZM M1 - -1 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 M change from year ago 1 1-9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 M* change from year ago 1 1-9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 *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 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 **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 1/1/7 Monetary Trends Adjusted Monetary Base change from year ago 1 1-9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Domestic Nonfinancial Debt change from year ago 1 Currency Held by the Nonbank Public change from year ago 1 1 Total Federal 1 - -1 1 7 1 7 8 7 7 8 Time Deposits* change from year ago Large Denomination 1 1 - -1 Small Denomination -1 7 7 8 *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 8 Money Market Mutual Fund Shares change from year ago Institutional Funds 1-1 Retail Funds - 7 7 8 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 1/1/7 M1 change at an annual rate 1-1 - - 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 *Actual values for September and October 1 are 87 and -8 percent rate, respectively MZM change at an annual rate 1-1 - 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 *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 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 *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 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 *See table of contents for changes to the series Federal Reserve Bank of St Louis
updated through 1//8 Monetary Trends Adjusted and Required Reserves Billions of dollars 1 1 8 Required Adjusted 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Total Borrowings, nsa Billions of dollars 18 Excess Reserves plus RCB Contracts Billions of dollars 1 1 1 1 9 8 1 7 1 7 8 *Actual value for September 1 is $ billion 1 7 1 7 8 *Actual value for September 1 is $ billion Nonfinancial Commercial Paper change from year ago - - - 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 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 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 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Federal Reserve Bank of St Louis 7
Monetary Trends updated through 1/9/8 Inflation and 1-Year-Ahead Inflation Expectations 1 8 Humphrey-Hawkins CPI Inflation Range Federal Reserve Bank of Philadelphia CPI Inflation University of Michigan 9 91 9 9 9 9 9 97 98 99 1 7 8 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 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Real Interest Rates, Real rate = Nominal rate less year-over-year CPI inflation 8 1-Year Treasury Yield Federal Funds Rate - - 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 8 Federal Reserve Bank of St Louis
updated through 1/9/8 Monetary Trends Short-Term Interest Rates 1 9-Day Commercial Paper 1 1 8 Prime Rate -Month Treasury Yield 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Long-Term Interest Rates 1 11 9 Conventional Mortgage 7 Corporate Aaa 1-Year Treasury Yield 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Long-Term Interest Rates 8 7 Corporate Baa 1-Year Treasury Yield 7 7 8 Short-Term Interest Rates 1 9-Day Commercial Paper -Month Treasury Yield 7 7 8 *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 8 Intended Federal Funds Rate Discount Rate Primary Credit Rate 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Data available as of November 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 1998 1999 1 7 1998 1999 1 7 8 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 8 1998 1999 1 7 1998 1999 1 7 1998 1999 1 7 8 1998 1999 1 7 8 Monetary Base Growth* and Inflation Targets 1 Actual 9 Target Inflation Rates % 1% % % % 1998 1999 1 7 98 99 1 7 8 *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 8 Components of McCallum's Rule 1-Year Moving Average Real Output Growth 8 1-Year Moving Average - -Year Moving Average 1-Year Moving Average -8 1998 1999 1 7 98 99 1 7 8-1998 1999 1 7 98 99 1 7 8 1 Federal Reserve Bank of St Louis
updated through 1/9/8 Implied One-Year Forward Rates 7 7 7 7 Week Ending: 1//7 1/7/7 1//8, daily data 8 Jan 8 Feb 8 Mar 8 Monetary Trends Rates on -Month Eurodollar Futures 7 y y y 7y 1y 8 11/ 11/1 11/19 11/ 1/ 1/1 1/17 1/ 1/1 1/7 Rates on Selected Federal Funds Futures Contracts, daily data 8 Mar 8 Jan 8 Feb 8 11/ 11/1 11/19 11/ 1/ 1/1 1/17 1/ 1/1 1/7 Rates on Federal Funds Futures on Selected Dates 8 11//7 1//7 1/8/7 Jan Feb Mar Apr May Jun Contract Month Inflation-Indexed Treasury Securities Weekly data Inflation-Indexed Treasury Yield Spreads Weekly data 1 1 1 Maturity 7 8 Note: Yields are inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Notes, weekly data US 1 1 1 Horizon 7 8 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 8 7 7 8 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 98 99 1 7 198 11 1188 1 119 178 119 11 188 1 11 197 11 17 171 17 18 1717 17 Interest Rates 1 8 -Month T-Bill M Own MZM Own 9 91 9 9 9 9 9 97 98 99 1 7 198 11 1188 1 119 178 119 11 188 1 11 197 11 17 171 17 18 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 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 1//7 Monetary Trends Gross Domestic Product change from year ago 1 1 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 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 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 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 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Dashed lines indicate 1-year moving averages M change from year ago 1 1 9 91 9 9 9 9 9 97 98 99 1 7 199 1991 199 199 199 199 199 1997 1998 1999 1 7 8 Dashed lines indicate 1-year moving averages Federal Reserve Bank of St Louis 1
Monetary Trends updated through 1/18/7 Bank Credit change from year ago 1 1 1998 1999 1 7 1998 1999 1 7 8 Investment Securities in Bank Credit at Commercial Banks change from year ago 1 1-1998 1999 1 7 1998 1999 1 7 8 Total Loans and Leases in Bank Credit at Commercial Banks change from year ago 1 1-1998 1999 1 7 1998 1999 1 7 8 Commercial and Industrial Loans at Commercial Banks change from year ago 1 1 - -1 1998 1999 1 7 1998 1999 1 7 8 1 Federal Reserve Bank of St Louis
updated through 1/9/8 Monetary Trends Standard & Poor's 1 8 1 1 1 Composite Index (left) 8 Price/Earnings Ratio (right) 18 9 91 9 9 9 9 9 97 98 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 7Q1 7Q 7Q Sep7 Oct7 Nov7 Dec7 19 1 1 17 181 19 1 7 1 1 11 118 17 11 17 188 8 18 17 19 1 7 9-1 -1 11 17 1 1 71 8 8 178 99 9 7 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 1/1/8-1/1/ 1/1/ 1/1/ 1/1/7 7 1/1/8 Federal Reserve Bank of St Louis 1
Monetary Trends updated through 1/18/7 Money Stock M1 MZM M M* Bank Credit Adjusted Monetary Base Reserves MSI M** 1191 89 9 89 98 977 881 98 171 7 987 87871 11879 798 9 119 1 7918 919 9718 71 7778 919 987 17178 791 818 97877 799 87 98 9 1779 7181 89 177 79 81 988 1 1881 7 91 98 77 79879 977 9 18 7 19 97 7177 8 9998 18 17 77 8197 9899 78 89 998 7 178 88 987 1881 78 818 9 87 1 17919 899 7718 79 8 99 1819 9 81 7898 8 9 191 71 88 889 8 971 18 711 99 881 88 97 7 1 17 719 7119 881 87 918 171 79 77 87 8999 98 1981 778 78 887 87 99 Nov 1777 819 1 1789 71 817 978 8 Dec 17181 87 888 11 71 817 9 7 Jan 17897 88 798 179 799 81 9789 Feb 179 898 78 1988 7717 81 987 9 Mar 18 979 7791 7788 8 98 Apr 188 979 8 7817 87 978 May 18788 991 8119 79919 8887 9 Jun 171 97 8 799 8797 999 Jul 17 9818 89 798899 89 9811 Aug 1718 711 8888 881 87 97 Sep 111 78 97 87117 81 979 Oct 19 719 97 87 879 997 Nov 17788 7177 99 879 88 97 Dec 19 79718 778 88 878 919 7 Jan 171817 7817 7879 887 81 97 Feb 11 7879 7181 87911 871 9 Mar 1979 7 71 881 88 98 Apr 179 78 7181 8 89 91 May 17981 7188 7787 8778 898 981 Jun 187 77 799 88 811 97 Jul 197 798 778 891 8198 97 Aug 17171 7789 788 889 88 9 Sep 191 787 778 899 81 977 Oct 17 79718 799 9 818 9 Nov 19 88 7 918197 87 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 1/9/8 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 11 11 1 11 1 11 7 8 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 1 7 78 8 1 7 9 91 91 9 7 1 1 1 7 7 98 1 9 8 7 98 97 97 91 7 9 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 Dec 1 1 71 97 9 7 7 7 Jan 9 7 9 7 1 Feb 9 7 7 7 Mar 9 7 88 7 7 9 Apr 79 7 77 7 89 99 8 1 May 9 9 79 1 8 97 11 9 8 Jun 99 8 9 9 11 89 8 Jul 8 8 7 9 8 1 7 Aug 8 8 9 8 88 8 1 Sep 8 9 9 7 1 87 Oct 8 7 7 1 91 Nov 8 7 81 Dec 8 97 8 7 1 7 Jan 8 11 79 7 89 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 Note: All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17
Monetary Trends updated through 1/1/7 M1 MZM M M* change at an annual rate 91 177 78 798 7 99 7 98 7 9 97 1 9 8 9 1-8 7 98 198 17 1 781-7 1 99 1 1 8 8-7 1-78 8 7 1-8 8 77 7 11 1-1 1 1 Nov 87 19 8 7 Dec - 17 7 899 Jan 8 77 817 19 Feb - 18 Mar 79 9 Apr - 8 7 May 9 1 199 Jun -1 8 Jul - Aug - 1 Sep -7 8 Oct 99 8 Nov 1 77 1 Dec - 17 91 7 Jan 1 71 98 Feb -98 8 Mar 87 179 9 Apr 8 1 9 May 9 Jun -18 8 1 Jul 97 Aug 7 1 1 Sep -8 191 Oct 9 18 Nov -7 17 9 *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 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 ((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 (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 7/1/17 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 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