MonetaryTrends May 8 New Monetary Policy Tools? Since the summer of 7, financial market turmoil has increased the demand for riskless, liquid assets and dried up liquidity in key markets Marketdetermined short-term interest rates, normally close to the federal funds rate, have risen sharply The bid-ask interest rate spread the difference between what lenders will charge and buyers will pay has widened In short, financial institutions have found it increasingly difficult to borrow money against collateral The Federal Reserve has intervened repeatedly to ease liquidity pressures in financial markets In a sequence of developments beginning in December 7, the Fed introduced three new policy instruments: the Term Auction Facility (TAF), the Term Securities Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF) The TAF is a credit facility that allows depository institutions (eg, commercial banks) to borrow from the Fed for 8 days against a wide variety of collateral 1 For the period of the loan, this action increases the Fed s assets and liabilities by the same amount (See the examples in black in the table s second column) These actions, though, would have the secondary effect of increasing bank reserves and ultimately also the monetary base In general, the Fed conducts open market operations (OMOs) to counteract unwanted increases (or decreases) in the monetary base; in this case, it has sold Treasury securities to exactly offset this increase (See the examples in green in the table s second column) The TSLF permits primary dealers to borrow Treasury securities against other securities as collateral for 8 days The range of securities that can be used as collateral is wider than for the TAF For example, it includes some mortgagebacked securities The TSLF is a bondfor-bond form of lending and it affects only the composition of the Fed s assets without increasing total reserves The PDCF is an overnight loan facility that provides funding for up to 1 days to primary dealers in exchange for collateral The PDCF accepts a broader range of securities than the TSLF and is a cash-for-bond form of lending As mentioned, to prevent PDCF operations from increasing the monetary base, the Fed offsets the increase with a sale of Treasury securities In short, the differences in these instruments are types of acceptable collateral, duration of the loan, which financial institutions have access, and the cost to the borrower All these actions distribute liquidity to the segments of the financial markets facing shortages; but, because they merely change the composition of the Fed s assets, they do not increase the monetary base On the other hand, this re-allocation of assets may reduce banks demand for excess reserves, and thereby encourage banks to lend more; this would effectively increase the broader monetary aggregates that include deposits without changing the monetary base Therefore, these instruments may indeed be tools of monetary policy Riccardo DiCecio and Charles S Gascon 1 For more details, see David C Wheelock, Another Window: The Term Auction Facility, Federal Reserve Bank of St Louis Monetary Trends, March 8 See page 19 in this publication for definitions of monetary aggregates A Hypothetical Federal Reserve Balance Sheet Views expressed do not necessarily reflect official positions of the Federal Reserve System researchstlouisfedorg OMOs* TAF TSLF PDCF Treasury securities +1 bil 1 bil 1 bil 1 bil Repos (net of reverse repos) TAF credit +1 bil Discount window credit PDCF +1 bil Other assets +1 bil Total assets +1 bil Reserves +1 bil +1 bil +1 bil Currency 1 bil 1 bil Total liabilities +1 bil NOTE: *The Fed uses open market operations as its standard tool for implementing monetary policy: The first column shows the Fed purchasing $1 billion in Treasuries and thus increasing the monetary base by the same amount
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 /1/8 Monetary Trends M and MZM Billions of dollars 9 87 8 81 78 MZM Treasury Yield Curve 7 Week Ending Friday: /1/7 /1/8 /11/8 7 7 7 7 9 M 7 7 8 7 8 9 y 7y 1y y Adjusted Monetary Base change at an annual rate 1-1 - 7 8 7 8 9 Real Treasury Yield Curve Week Ending Friday: 7 /1/7 /1/8 /11/8 17 1 1 1 7 y 7y 1y y Reserve Market Rates 8 7 7 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate 7 8 7 8 9 Data available as of March 8 Federal Reserve Bank of St Louis Inflation-Indexed Treasury Yield Spreads 8 Week Ending Friday: /1/7 7 /1/8 /11/8 1 19 y 7y 1y y
Monetary Trends updated through /1/8 MZM and M1 1 1 MZM M1 - -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 M 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 M* 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** 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 /1/8 Monetary Trends Adjusted Monetary Base 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 Domestic Nonfinancial Debt 1 Currency Held by the Nonbank Public 1 1 Total Federal 1 - -1 1 7 1 7 8 7 8 7 8 9 Time Deposits* Large Denomination 1 Small Denomination 1-7 8 7 8 9 *See table of contents for changes to the series Checkable and Savings Deposits 1 1 Savings - Checkable -1-1 7 8 7 8 9 Money Market Mutual Fund Shares Institutional Funds 1 Retail Funds -1-7 8 7 8 9 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 /1/8 M1 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 *Actual values for September and October 1 are 87 and -8 percent rate, respectively MZM 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 *Actual value for September 1 is 91 percent rate 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 *Actual value for September 1 is 9 percent rate 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 /1/8 Monetary Trends Adjusted and Required Reserves Billions of dollars 1 1 8 Required Adjusted 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 Total Borrowings, nsa Billions of dollars 1 18 1 1 9 1 7 8 1 7 8 9 * Total borrowings include loans to depository institutions for primary, secondary, seasonal credit, primary dealer credit facility, and other credit extensions, but exclude term auction credit Excess Reserves plus RCB Contracts Billions of dollars 1 1 8 1 7 8 1 7 8 9 *Actual value for September 1 is $ billion Nonfinancial Commercial Paper - - - 91 9 9 9 9 9 97 98 99 1 7 8 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 9 For more information, please refer to http://wwwfederalreservegov/releases/cp/abouthtm Consumer Credit 1 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 Federal Reserve Bank of St Louis 7
Monetary Trends updated through //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 91 9 9 9 9 9 97 98 99 1 7 8 9 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 - 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 Real Interest Rates, Real rate = Nominal rate less year-over-year CPI inflation 8 1-Year Treasury Yield Federal Funds Rate - - 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 8 Federal Reserve Bank of St Louis
updated through //8 Monetary Trends Short-Term Interest Rates 1 9-Day Commercial Paper 1 1 8 Prime Rate -Month Treasury Yield 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 Long-Term Interest Rates 1 11 9 Conventional Mortgage 7 Corporate Aaa 1-Year Treasury Yield 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 Long-Term Interest Rates 8 Corporate Baa 7 1-Year Treasury Yield 7 8 7 8 9 Short-Term Interest Rates 1 9-Day Commercial Paper -Month Treasury Yield 7 8 7 8 9 *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 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 Data available as of March 8 Federal Reserve Bank of St Louis 9
Monetary Trends updated through /1/8 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 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 /1/8 Implied One-Year Forward Rates 9 9 9 Week Ending: /1/7 /1/8 /11/8, daily data 1 Apr 8 9 7 Monetary Trends Rates on -Month Eurodollar Futures 9 9 19 1 Jun 8 May 8 9 y y y 7y 1y 19 /11 /18 / / /1 /17 / /1 /7 /1 Rates on Selected Federal Funds Futures Contracts, daily data 7 Apr 8 Rates on Federal Funds Futures on Selected Dates 7 /1/8 1 May 8 Jun 8 18 1 /11 /18 / / /1 /17 / /1 /7 /1 1 /11/8 18 /1/8 1 Apr May Jun Jul Aug Sep Contract Month Inflation-Indexed Treasury Securities Weekly data Inflation-Indexed Treasury Yield Spreads Weekly data 1 1 1 Maturity 7 8 9 Note: Yields are inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Notes, weekly data 1 UK France US 1 1 1 Horizon 7 8 9 Note: Yield spread is between nominal and inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Yield Spreads, weekly data 1 UK France US 7 8 7 8 9 7 8 7 8 9 Federal Reserve Bank of St Louis 11
Monetary Trends updated through /1/8 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 /1/8 Monetary Trends Gross Domestic Product 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 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 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 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 Dashed lines indicate 1-year moving averages Federal Reserve Bank of St Louis 1
Monetary Trends updated through /1/8 Bank Credit 1 1 1999 1 7 8 1999 1 7 8 9 Investment Securities in Bank Credit at Commercial Banks 1 1-1999 1 7 8 1999 1 7 8 9 Total Loans and Leases in Bank Credit at Commercial Banks 1 1-1999 1 7 8 1999 1 7 8 9 Commercial and Industrial Loans at Commercial Banks 1 1 - -1 1999 1 7 8 1999 1 7 8 9 1 Federal Reserve Bank of St Louis
updated through //8 Monetary Trends Standard & Poor's 1 8 1 1 1 Composite Index (left) 8 Price/Earnings Ratio (right) 18 91 9 9 9 9 9 97 98 99 1 7 8 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 7Q1 7Q 7Q 7Q Dec7 Jan8 Feb8 Mar8 1 1 7 7 1 181 19 1 1 1 87 8 11 118 17 1 181 11 1 17 19 1 - - -1 1 1 1 11 8 8 178 9 9 9 Inflation and Long-Term Interest Rate Differentials Canada Canada UK UK - Germany Germany - Japan Japan Inflation differential = Foreign inflation less US inflation Long-term rate differential = Foreign rate less US rate - 1/1/ 1/1/ 1/1/7 7 1/1/8 8 1/1/9-1/1/ 1/1/ 1/1/7 7 1/1/8 8 1/1/9 Federal Reserve Bank of St Louis 1
Monetary Trends updated through /1/8 Money Stock M1 MZM M M* Bank Credit Adjusted Monetary Base Reserves MSI M** 178 787 9878 87871 11999 798 9 119 1 787 9718 99 7778 919 987 17178 71 8 97877 7889 87 98 9 178 999 88 177 7918 81 9887 7 19 788 7 8799 8 91 1 18189 89998 7 71 8 99 1799 97 898 7881 8 9 17 7877 8791 877 8 97 188 718 9919 891111 88 97 7 1 19 791 71171 81889 87 918 1787 7 7787 87177 899 98 178 7719 711 88 87 9 178 88 7981 91 8811 981 8 1 19971 811 77 9787 81 9 Mar 181 918 771 771 8 98 Apr 187 99 799 789 87 978 May 181 979 887 7918 8887 9 Jun 1791 997 8191 797 8797 999 Jul 177 987919 87 7989 89 9811 Aug 1711 79 8781 887 87 99 Sep 197 787 91 871 81 979 Oct 179 788 9 891 879 9971 Nov 171 719 9898 88171 88 97 Dec 1 781 7189 87 878 9191 7 Jan 171 711 7818 899 81 9 Feb 1798 7979 718978 898 87 918 Mar 199 778 7191 87 88 989 Apr 1771 717 778 817 8899 9 May 178 717 771 8791 8981 988 Jun 11 779 71 88 811 981 Jul 1799 7111 7787 87 8198 97 Aug 197 779 71918 88789 88 99 Sep 11 781 77 891 81 9877 Oct 1919 799 7981 9 8 989 Nov 17 88 797978 9189 87 97 Dec 199 8999 779 918779 878 9179 8 Jan 17 818 7771 98817 818 91 Feb 177 87 7819 979 8918 99 Mar 17 891 71 9988 88 9788 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 //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 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 88 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 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 Note: All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17
Monetary Trends updated through /1/8 M1 MZM M M* change at an annual rate 71 99 7 97 7 9 97 19 7 79 9 7-7 918 9 1 198 9 - -8 9 11 771 7 7 1 1 9 71 8 181 1-1 1199 7-19 79 8 1 8 189 9 Mar 7 1 9 Apr - 8 May 1 191 18 Jun -7 1 Jul -1 19 8 Aug -9 7 Sep -81 8 8 Oct 1 11 91 Nov 7 77 19 Dec -91 17 7 7 Jan 9 77 8 Feb - 79 Mar 198 18 81 Apr 89 17 79 May -1 99 7 Jun -817 7 7 Jul 88 9 Aug 1 1 8 Sep -9 1 9 Oct 71 1 78 Nov -1 1 1 Dec 8 17 8 8 Jan 1 797 Feb 8 1 17 Mar 7 1 *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