MonetaryTrends August What is the slope of the yield curve telling us? A yield curve is a graph of interest rates for bonds that have similar risk characteristics but differing maturities. Most of the time, the yield curve is upward sloping rates on long-term bonds are higher than rates on short-term instruments. Sometimes, however, short-term interest rates are close to, or even higher than, long-term interest rates. In those cases, the yield curve is described as flat or inverted, respectively. A flat or inverted yield curve rings alarm bells because such a situation often precedes recessions. No one is completely certain why this occurs but there are several possibilities. First, a flat yield curve could result from tight current monetary policy, which drives up current short-term interest rates while not affecting longer-term rates much. Second, according to one theory of the yield curve, long-term rates are positively related to the market s expectation for future short-term rates. A flat or inverted yield curve might indicate that the market expects real interest rates to fall as a result of easier monetary policy and/or lower future levels of real economic activity. Currently, yields on long-term U.S. Treasury bonds are low, compared to short-term interest rates. The figure shows the probability of recession three months ahead as estimated by two simple statistical models using the slope of the yield curve. The first model uses the -year Treasury yield less the three-month Treasury bill rate, while the second uses the Aaa corporate bond with -or-more years to maturity instead of the -year Treasury bond. While both yield series fit the historical data about equally well, they currently make very different forecasts. The yield curve with the -year Treasury bond estimates the August probability of recession to be percent; the model with the Aaa bond yield produces a probability of only percent. Predicted Probability of Recession One explanation for the difference in the forecasts is that the Treasury s debt management program, which has diminished the supply of long-term Treasury bonds, also has reduced their yield relative to those on corporate bonds. Many analysts consider the forecast from the Aaa bonds to be more reliable because of the historically unusual fall in the supply of long-term Treasury bonds. Others, however, point to changes in the corporate-bond market that might have rendered these yields unreliable, as well. The confidence one has in the forecasts from the two models depends on whether one believes that current Treasury and Aaa data are comparable to past data in similar economic conditions. We should remember that although models based on the slope of the yield curve do fairly well relative to other macro and financial variables, their absolute forecasting ability is not great. The models failed, for example, to generate a high probability of recession before the 199 recession. At other times, they have predicted high probabilities of recessions that never came (e.g., 197). In addition, developments in the structure of the economy might change the relationship between the yield curve and economic activity. Christopher J. Neely 1..9.8.7....3.2.1 Recession -Year Treasury 3-month ahead Forecast -or-more-year Aaa 3-month ahead Forecast. 191 19 199 1973 1977 1981 198 1989 1993 1997 1 Views expressed do not necessarily reflect official positions of the Federal Reserve System.
TableofContents Page 3 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 Policy-Based Inflation Indicators 11 Implied Forward Rates, Futures Contracts, and Inflation-Protected Securities 12-13 Velocity, Gross Domestic Product, and M2 1 Bank Credit Stock Market Index, and Foreign Inflation and Interest Rates 1-18 Reference Tables 18- Definitions, Notes, and Sources Conventions used in this publication: 1. Unless otherwise indicated, data are monthly. 2. Shaded areas indicate recessions, as dated by the National Bureau of Economic Research. 3. The percent change at an annual rate is the simple, not compounded, monthly percent change multiplied by 12. 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] x. 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-12 and the current month t is: [(x t / x t-12 ) - 1] x. We welcome your comments addressed to: Editor, Monetary Trends Research Division P.O. Box 2 St. Louis, MO 31 or to: webmaster@stls.frb.org Monetary Trends is published monthly by the Research Division of the. Single-copy subscriptions are available free of charge by writing Public Affairs Office,, Post Office Box 2, St. Louis, MO 31-2 or by calling (31) -888 or (31) -889. Subscription forms can also be filled out electronically at http://www.stls.frb.org/research/order/pubform.html. For more information on data, please call (31) -89. Information in this publication is also included in the Federal Reserve Economic Data (FRED) electronic bulletin board at (31) 21-182 or internet World Wide Web server at http://www.stls.frb.org/fred. The entire publication is also available electronically at http://www.stls.frb.org/publications/mt.
M2 and MZM Billions of $ 7 % M2 1% 2 37 3 MZM 32 3 1997 1998 1999 Dotted lines indicate the FOMC target ranges. % 1% Reserve Market Rates.7 Effective Federal Funds Rate Expected Federal Funds Rate..2..7..2..7..2 Discount Rate 1997 1998 1999 Adjusted Monetary Base change at an annual rate 3 - - Treasury Yield Curve 7.7 Week ending: 7/1/99 7.2 /1/ 7/1/.7.2.7.2.7-3 1997 1998 1999.2 3m1y 2y 3y y 7y y y 3y Total Bank Credit change at an annual rate 3-1997 1998 1999 Interest Rates Apr May Jun Federal Funds Rate.2.27.3 Discount Rate..71. Prime Rate 9. 9.2 9. Conventional Mortgage Rate 8. 8.2 8.29... Treasury Yields Yields:... 3-month constant maturity.82.99.8 -month constant maturity.7.39.2 1-year constant maturity..33.17 3-year constant maturity.3.77.3 -year constant maturity.2.9.3 -year constant maturity.99.. 3-year constant maturity.8..93
MZM and M1 change from year ago MZM - - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 M1 M2 change from year ago - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Dotted lines indicate the FOMC target ranges. M3 change from year ago - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Dotted lines indicate the FOMC target ranges. Monetary Services Index - M2 change from year ago - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99
Adjusted Monetary Base change from year ago 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Domestic Nonfinancial Debt change from year ago Currency Held by the Nonbank Public change from year ago Total Federal - 1993 199 199 199 1997 1998 1999 1997 1998 1999 Time Deposits Checkable and Savings Deposits change from year ago change from year ago 2 Large Denomination Savings Small Denomination - Checkable - - - - 1997 1998 1999 1997 1998 1999 Money Market Mutual Fund Shares change from year ago Repurchase Agreements and Eurodollars Billions of dollars Billions of dollars 3 3 3 3 2 Institutional funds 3 2 Repos (left) 2 Retail funds Eurodollars (right) 1997 1998 1999 1997 1998 1999
M1 change at an annual rate 3 - - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 MZM change at an annual rate 3 - - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 M2 change at an annual rate 3-83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 M3 change at an annual rate 3-83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99
Adjusted and Required Reserves Billions of $ 8 Adjusted Required 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Total Borrowings, nsa Billions of $.8 Excess Reserves plus RCB Contracts Billions of $ 12.. 8.2. 1993 199 199 199 1997 1998 1999 1993 199 199 199 1997 1998 1999 Nonfinancial Commercial Paper change from year ago - - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Consumer Credit change from year ago - - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99
Inflation and Inflation Expectations 8 Federal Reserve Bank of Philadelphia CPI inflation Humphrey-Hawkins CPI inflation range 2 University of Michigan 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 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. See page 19 for information. Treasury Security Yield Spreads Yield to maturity 3 year - 3 month 2 3 year - 3 year 3 year - 3 month -2 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Real Interest Rates, Real rate = Nominal rate less CPI inflation 8 2-2 1-year Treasury Yield Federal Funds Rate 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99
Short Term Interest Rates 1 12 8 9-day Commercial Paper 3-month Treasury Yield Prime Rate 2 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Long Term Interest Rates 1 1 12 Conventional mortgage 8 Corporate Aaa 3-year Treasury Yield 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Long Term Interest Rates 9 Short Term Interest Rates 9 8 Corporate Baa 8 7 3-year Treasury Yield 7 9-day Commercial Paper -year Treasury Yield 3-month Treasury Yield 1997 1998 1999 1997 1998 1999 FOMC Expected Federal Funds Rate and Discount Rate 12 8 2 Federal Funds Rate Discount Rate 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99
Federal Funds Rate and Inflation Targets 12 % 3% 2% 1% % Target Inflation Rates 9 Actual 3 1991 1992 1993 199 199 199 1997 1998 1999 Calculated federal funds rate is based on Taylor s rule. See notes on page 19. Actual and Potential Real GDP Billions of chain-weighted 199 dollars 9 9 8 8 7 Potential 7 Actual 1991 1992 1993 199 199 199 1997 1998 1999 PCE Inflation change from year ago 3 2 1 1991 1992 1993 199 199 199 1997 1998 1999 Monetary Base Growth* and Inflation Targets 12 9 Actual (2-year moving average) 3 % 1% 2% 3% % Target Inflation Rates 1991 1992 1993 199 199 199 1997 1998 1999 *Modified for the effects of sweeps programs on reserve demand. Calculated base growth is based on McCallum s rule. See notes on page 19. Monetary Base Velocity Growth Actual Real Output Growth 8 - -year moving average Actual -year moving average -8 1991 1992 1993 199 199 199 1997 1998 1999-1991 1992 1993 199 199 199 1997 1998 1999
Implied One-Year Forward Rates 9 8 7 Week ending: 7/1/99 /1/ 7/1/ 3 2y3y y 7y y y 3y Rates on 3-Month Eurodollar Futures, daily data 7. Sep 7.3 7.2 7.1 7. Aug Jul.9.8.7 / /22 /29 / /12 /19 /2 7/3 7/ 7/17 Rates on Selected Fed Funds Futures Contracts, daily data 7.1 7..9 Sep Aug.8.7 Jul.. / /22 /29 / /12 /19 /2 7/3 7/ 7/17 Implied Yields on Fed Funds Futures 7.1 7. /12/.9 /1/.8.7. 7/1/.. Jul Aug Sep Oct Nov Dec Inflation-Protected Treasury Yields, weekly data.. -year 3-year 3. -year Inflation-Protected Treasury Yield Spreads, weekly data -year 3 3-year 2 -year 1 3. 1997 1998 1999 1997 1998 1999 Inflation-Indexed 3-Year Bonds, weekly data Inflation-Indexed -Year Bonds, weekly data 3 2 UK Canada US 3 2 UK US 1 1 199 1997 1998 1999 199 1997 1998 1999
MZM Velocity and Opportunity Cost Velocity = Nominal GDP / MZM 3. Opportunity Cost = 3 month T-bill rate less MZM own rate. 3. 2. Velocity 7.. 2. 1. Opportunity Cost 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 2.. M2 Velocity and Opportunity Cost Velocity = Nominal GDP / M2 2.2 2. Opportunity Cost = Treasury rate less M2 own rate. Velocity 7. 1.7 1. 1.2 Opportunity Cost (-yr T-bond) Opportunity Cost (3-mo T-bill) 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99. 2.. M2, MZM and Nominal GDP Billions of $ 8 Nominal GDP M2 MZM 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Interest Rates M2 own -yr bond MZM own 3-mo bill 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99
Gross Domestic Product change from year ago 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Real Gross Domestic Product change from year ago - 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Gross Domestic Product Price Index change from year ago 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 M2 change from year ago 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 Dashed lines indicate -year moving averages
Bank Credit change from year ago 1991 1992 1993 199 199 199 1997 1998 1999 Investment Securities in Bank Credit at Commercial Banks change from year ago - 1991 1992 1993 199 199 199 1997 1998 1999 Total Loans and Leases in Bank Credit at Commercial Banks change from year ago - 1991 1992 1993 199 199 199 1997 1998 1999 Commercial and Industrial Loans at Commercial Banks change from year ago - 1991 1992 1993 199 199 199 1997 1998 1999
Standard and Poor s 1 1 8 Price/earnings ratio (right) Composite Index (left) 83 8 8 8 87 88 89 9 91 92 93 9 9 9 97 98 99 8 2 3 3 2 18 12 Inflation and Long-Term Interest Rates Trend in Consumer Price Inflation Rates change from year ago Recent Long-Term Government Bond Rates 1999Q2 1999Q3 1999Q Q1 Mar Apr May Jun United States 2.9 2.2 2. 3..33.1.9.23 Canada 1.9 2.18 2.3 2..93.9..89 France.3.3 1. 1..73.8.92. Germany.8..9 1.78.33.22.38.19 Italy 1. 1.72 2. 2.3.1.1.71.2 Japan -.22.7-1. -. 1.82 1.73 1.72 1.9 United Kingdom 1.2 1.17 1.7 2.3.3.3.. Inflation and Long-Term Interest Rates Differentials 3 Inflation differential = Foreign inflation less U.S. Inflation Long-term rate differential = Foreign rate less U.S. rate 3 Germany Canada Canada U.K. U.K. Germany Japan -3-3 - - 1997 1998 1999 1997 1998 1999 Japan
Money Stock M1 MZM M2 M3 Bank Credit Monetary Base Reserves MSI M2 199. 113.38 29.9 37.3.289 3.79 3.99 7.838 2.1 199. 1.3 39.32 377. 79.88 383.839.72 73.1 217.88 1997. 9.929 3318.32 3931.83 179.93 391.999 78.78 8.873 227.7 1998. 8.8 37.32 221.72 711.132 323.792 8.92.92 22.237 1999. 12.371 8.377 39.239 2.7 81.83 7.8 71.7 28. 1998 1 7.722 32.89 98.3 99.27 18.71 98.3 7. 23.93. 2 78.9 337. 17.2 38.731 28.17 2.. 239.9. 3 7.8 37.138 29.273 73. 38.7 11..9 23.733. 91.92 3913.71 32.72 93.121 12.97 23.881 7. 29.3 1999 1 97.2 33.398.11.7 11.39 3.33 7.91 23.37. 2 12.97 127. 11.2.71 2.97.912.2 27.3. 3 98.82 199.2 71.11 232.1 91.2 7.98 8.111 2.28. 1111.222 273.2 29.9 389.398 9.339 91.21 8.3 23.7 1 1112.18 38.91 99.98 7. 8.9 93.9 71. 27.7. 2 17.91 2.3 77.127 8.18 9.889 8.37.82 27.8 1998 Jun 77.8 373..399 82.7 272.87..12 21.1. Jul 7.87 37.73 219.7 73.3 29. 7.18.37 22.27. Aug 73.12 3739.77 23.2 72.23 31.9 11.31 7.371 23.. Sep 78.211 3798.193 28.789 82.37 398.97.99 7.3 2.9. Oct 8.73 38.23 327. 887.7 8.82.8 7.8 27.3. Nov 93.73 39.78 3.17 9.992 17.7 2.379 7.182 29.. Dec 97.371 393.11 39.791 99.98 3.91 2.8 7.7 21. 1999 Jan 9.97 3998.22 22.18 28. 2.731 31.71 8.17 22.2. Feb 9.273 39. 7.89 77.897 1.9 38.19 8.7 23.. Mar 11.39 2.7 3.77 87.7 9.2 39.3.88 2.39. Apr 17.19 99. 9.18 123.71.39 39.8.9 2.9. May 11.8 129.287 13..2 1.382 8.331 8.23 27.7. Jun 1.7 3. 3.922 187.277.18 9.79 7. 28.. Jul 99. 177.27 2.829 211.9. 3..88 29.2. Aug 98.83.873 7.1 229.93 93.37.711 7.28 2.2. Sep 9.99 219. 9.13 2.92 17.9.13 7. 21.38. Oct 11.271 22.73 7.91 3.2 33.17 72.989 73.19 22.3. Nov 19.1 27.17 27.28 38.79 87.7 88.8 83.91 23.. Dec 1122.9 37.38. 7.91 72.781 12.7 9.7 2.97 Jan 1119.9 3.93 79.27 21.21 787.877.79 8.2 2.19. Feb.81 3.8 91.23 38.979 818.93 89.978 8.22 2.7. Mar 1112.328 39.191 728.2 12.138 8. 8.19.3 28.. Apr 111.9 2.8 78.7 7.12 92.9 82.891.272 27.7. May.98.9 7.79 8.2 98.9 87.9 7.7 27.. Jun 12.23 27.93 77.81 718.777.2 8.2.33 271. *All values are given in billions of dollars
Federal Discount Prime 3-mo Treasury Yields Corporate S & L Conventional Funds Rate Rate CDs 3 mo 3 yr 3 yr Aaa Bonds Aaa Bonds Mortgage 199..8.21 8.83.92..2.88 7.9.8 7.9 199..3.2 8.27.39..99.7 7.37.2 7.8 1997... 8..2...1 7.2.32 7. 1998..3.92 8.3.7.91.1.8.3.93.9 1999..97.2 7.99.33.78.9.87 7..28 7.3 1998 1.2. 8...19..88.7.9 7.. 2.. 8..9.11.7.8.. 7.9. 3.3. 8..3.9.11.7.9.9.87..8. 7.92..37.1.11.33.82.7 1999 1.73. 7.7.9.3.87.37.2.87.88. 2.7. 7.7.98.9.3.8.93. 7.. 3.9. 8..38.79.71. 7.33.2 7.8..31.87 8.37....2 7.9.79 7.83 1.8.19 8.9.3.7..3 7.71.82 8.2. 2.27.7 9.2.7.89.2.98 7.77.72 8.32 1998 Jun.. 8...12.2.7.3.97 7.. Jul.. 8..9.9.7.8..1.9. Aug.. 8..8..2..2.1.92. Sep.1. 8.9.1.7.2...8.72. Oct.7.8 8.12.21.7.18.1.37.7.71. Nov.83.3 7.89.2.3.7.2.1.87.87. Dec.8. 7.7.1..8..22.83.72 1999 Jan.3. 7.7.89..1.1.2.8.79. Feb.7. 7.7.9..9.37..8.81. Mar.81. 7.7.91.7.11.8.2.9 7.. Apr.7. 7.7.88.1.3...89.92. May.7. 7.7.92.3.33.81.93. 7.. Jun.7. 7.7.13.72.7. 7.23.22 7.. Jul.99. 8..2.9.2.98 7.19.2 7.3. Aug.7. 8..1.87.77.7 7..7 7.9. Sep.22.7 8.2..82.7.7 7.39. 7.82. Oct..7 8.2.13.2.9.2 7..78 7.8. Nov.2.8 8.37..23.92. 7.3.77 7.7. Dec.3. 8...3.1.3 7..82 7.91 Jan.. 8..9..9.3 7.78.91 8.21. Feb.73.2 8.73.1.73..23 7.8.88 8.33. Mar.8.3 8.83.1.8.3. 7.8.8 8.2. Apr.2. 9..28.82.3.8 7.. 8.. May.27.71 9.2.71.99.77. 7.99.87 8.2. Jun.3. 9..73.8.3.93 7.7.9 8.29 *All values are given as a percent at an annual rate
M1 MZM M2 M3 change from previous period 199. -.21 -. 2.. 199. -3...81.9 1997. -3.3 7.18.92 7.98 1998. 1.2 11. 7.37.2 1999. 1.99 12.23 7.2 8.7 1998 1.73 2.8 1.93 2.. 2.18 3. 1.89 2.. 3 -.2 2.99 1.7 2.21. 1.7. 2.7 3.12 1999 1.8 3.8 1.87 2.. 2.3 2.33 1.1 1.. 3 -. 1.7 1.32 1.2. 1. 1.77 1.29 2.3 1.12 1.99 1. 2.3. 2 -.1 1.1 1. 1.9 1998 Jun.13.99..78. Jul -.9.7..37. Aug -.3 1..7 1.3. Sep.7 1.7 1.1 1.8. Oct. 1.3.97 1.9. Nov.8 1..8.97. Dec.33 1.22.7.87 1999 Jan -.13.88.8.3. Feb -.1 1.3.7.82. Mar...3.1. Apr.3.93..9. May -..72..3. Jun -.1.8... Jul -..8.8.38. Aug -.7..39.29. Sep -.2..3.3. Oct.7..37.81. Nov.7.. 1.2. Dec 1.22.88.1 1. Jan -.31.77.1.8. Feb -1.21 -.1.2.27. Mar.9 1.23.79 1.12. Apr.37.7.8.9. May -1.2 -.9 -.8.3. Jun -.2..2.8
Definitions M1: the sum of: currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. 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: M2 minus small denomination time deposits, plus institutional money market mutual funds. The label MZM was coined by William Poole (1991) for this aggregate, proposed earlier by Motley (1988). Due to distortions caused by regulatory changes, the largest of which the introduction of money market accounts, data for MZM begin March 1983 in this publication. M2: M1 plus: savings deposits (including money market deposit accounts) and small denomination (less than $,) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments of less than $,), net of retirement accounts. M3: M2 plus: large denomination ($, or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank U.S. addresses held at foreign offices of U.S. 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 U.S. Treasury, federally sponsored agencies, state and local governments, households, and firms except depository institutions and money market mutual funds. Adjusted Monetary Base: the sum of currency in circulation outside Federal Reserve Banks and the U.S. 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). 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 series, a 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) and http://www.stls.frb.org/research/newbase.html. Monetary Services Index: an index which 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 M2; additional data are available at http://www.stls.frb.org/research/msi/index.html. Note: M1, M2, M3, Bank Credit and Domestic Nonfinancial Debt are constructed and published by the Board of Governors of the Federal Reserve System. For details, see Federal Reserve Bulletin, tables 1.21 and 1.2. MZM, Adjusted Monetary Base, Adjusted Reserves and Monetary Services Index are constructed and published by the Research Division of the. Notes Page 3: MZM, or Money, Zero Maturity includes the zero maturity, or immediately available, components of M3. MZM equals M2 minus small denomination time deposits, plus institutional money market mutual funds (that is, the money market mutual funds included in M3 but excluded from M2). 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 http://www.stls.frb.org/research/swdata.html. For analytical purposes, MZM largely replaces M1. The Discount Rate and Expected 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 H. Statistical Release. Treasury Yield Curve shows constant maturity yields calculated by the U.S. Treasury Department for securities with 3 months and 1, 2, 3,, 7,, and 3 years to maturity. Daily data and a description are available at http://www.stls.frb.org/fred/data/wkly.html. See also Federal Reserve Bulletin, table 1.3. Page : Total Checkable Deposits is the sum of demand and other checkable deposits. Total Savings Deposits is the sum of money market deposit accounts (MMDA), and passbook and statement savings. Time Deposits have a minimum initial maturity of 7 days. Large Time Deposits are deposits of $, or more. Retail and Institutional Money Market Mutual Funds are as included in M2 and the non-m2 component of M3, 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 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 range as reported to the Congress in the February Humphrey-Hawkins Act testimony each year. Beginning February, the FOMC began using the Personal Consumption Expenditures (PCE) price index to report its inflation range, and therefore is not shown on this graph. CPI Inflation is the percentage change from a year ago in the CPI for all urban consumers. Real Interest Rates are ex post measures, equal to nominal rates minus CPI inflation. Page 9: FOMC Expected Federal Funds Rate is the level (or midpoint of the range, if applicable) of the federal funds rate that the staff of the Federal Open Market Committee expected to be consistent with the desired degree of pressure on bank reserve positions. Page : 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 (1993) equation f * t = 2. + π t-1 + (π t-1 - π * )/2 + (y t-1 - y P t-1 )/2 to five alternative target inflation rates π * =, 1, 2, 3, percent, where f * t is the implied federal funds rate, π t-1 is the previous period s inflation rate (PCE), y t-1 is the log of the previous period s level of real GDP, and y P t-1 is the log of an estimate of the previous period s level of potential output. Potential real output 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, 1993) equation MB * t = π * + (-year moving average growth of real GDP) (-year moving average of base velocity growth)
to five alternative target inflation rates π * =, 1, 2, 3, percent, where MB * t is the implied growth rate of the adjusted monetary base. The -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 four-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 percent of the total amount swept, as estimated by the Federal Reserve Board staff. These estimates are imprecise, at best. Sweep program data are available at http://www.stls.frb.org/research/swdata.html. 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,..., 3 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 2)(1 e -m/ )/(m/) a 2 e -m/, and forward rates are calculated from these smoothed yields using equation (a) in Table 13.1 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. For a discussion of the use of forward rates as indicators of inflation expectations, see Sharpe (1997). Rates on 3-Month Eurodollar Futures and Rates on Selected Fed Funds Futures Contracts each trace through time the yield on three specific contracts. Implied Yields on Fed Funds Futures displays a single day s snapshot of yields for contracts expiring in the months shown on the horizontal axis. Inflation-Protected Treasury Yield Spreads equal, for,, and 3 year maturities, the difference between the Treasury constant maturity yield and the yield on the most recently issued inflation-protected security. Inflation-Indexed Bonds for Canada are the 31-year bond with a maturity date of 12/1/2; for the U.K., the 37.-year bond with a maturity date of 7/17/2 and the 12.1-year bond with a maturity date of /21/; and, for the U.S., the 3-year bond with a maturity date of //28 and the -year bond with a maturity date of 1//7. Page 12: Velocity (for MZM and M2) equals the ratio of GDP, measured in current dollars, to the level of the monetary aggregate. MZM and M2 Own Rates are weighted averages of the rates received by households and firms on the assets included in the aggregates. Two alternative opportunity costs are shown, one relative to the 3-month Treasury constant-maturity yield, the other to the -year constantmaturity yield. Page 13: Real Gross Domestic Product is GDP as measured in chained 1992 dollars. The Gross Domestic Product Price Index is the implicit price deflator for GDP, which is defined by the Bureau of Economic Analysis, U.S. Department of Commerce, as the ratio of GDP measured in current dollars to GDP measured in chained 1992 dollars. Page 1: Investment Securities are all securities held by commercial banks in both investment and trading accounts. Sources Bank of Canada Canadian inflation-linked bond yields. Bank of England U.K. inflation-linked bond yields. Board of Governors of the Federal Reserve System Monetary aggregates and components, nonfinancial debt: H. release; bank credit and components: H.8 release; consumer credit: G.19 release; required reserves, excess reserves, clearing balance contracts and discount window borrowing: H..1 and H.3 releases; interest rates: H. and G.13 releases; nonfinancial commercial paper: Board of Governors web site; M2 and MZM own rates. Bureau of Labor Statistics Consumer price index. Federal Reserve Bank of Philadelphia Survey of Professional Forecasters inflation expectations. Adjusted monetary base and adjusted total reserves, monetary services index, one-year forward rates. Organization for Economic Cooperation and Development International interest and inflation rates. University of Michigan Survey Research Center Median expected price change. Congressional Budget Office Potential real GDP. Dow Jones and Co. (Wall Street Journal) Federal funds futures contracts, Eurodollar futures. Standard and Poors Inc. Stock price-earnings ratio, stock price composite index. U.S. Department of the Treasury U.S. inflation-protected 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 199, pp. 3-13. and (199b). Measuring the Adjusted Monetary Base in an Era of Financial Change, Review, November/December 199, pp. 3-37., Barry E. Jones and Travis D. Nesmith (1997). Special Report: The Monetary Services Indexes Project of the Federal Reserve Bank of St. Louis, Review, January/ February 1997, pp. 31-82. McCallum, Bennett T. (1988). Robustness Properties of a Monetary Policy Rule, Carnegie-Rochester Conference Series on Public Policy, vol. 29, pp. 173 -. (1993). Specification and Analysis of a Monetary Policy Rule for Japan, Bank of Japan Monetary and Economic Studies, November, pp. 1 -. Motley, Brian (1988). Should M2 Be Redefined? Federal Reserve Bank of San Francisco Economic Review, Winter, pp. 33-1. Nelson, Charles R. and Andrew F. Siegel (1987). Parsimonious Modeling of Yield Curves, Journal of Business, October, pp. 73-89. Poole, William (1991). Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November, 1991. Government Printing Office, Serial No. 2-82. Sharpe, William F. (1997). Macro-Investment Analysis, on-line textbook available at www-sharpe.stanford.edu/mia.htm. Shiller, Robert (199). The Term Structure of Interest Rates, Handbook of Monetary Economics, vol. 1, B. Friedman and F. Hahn, eds., pp. 27-722. Taylor, John B. (1993). Discretion versus Policy Rules in Practice, Carnegie-Rochester Conference Series on Public Policy, vol. 39, pp. 19-21. Note: Articles from this Bank s Review are available on the Internet at www.stls.frb.org/research/reviewdat.html. Bureau of Economic Analysis Gross domestic product.