Unless something is done, the United States faces the

MonetaryTrends March Fiscal Policy and Expected Inflation Unless something is done, the United States faces the prospect of unprecedented deficits and exploding debt-to-gdp (gross domestic product) ratios. Budget analysts forecast the publicly held U.S. debt-to-gdp ratio will rise from percent at fiscal year-end to 8 percent by. Although a few developed countries (e.g., Japan and Italy) have managed to avoid default with very high debt-to-gdp ratios, rising prices of credit default swaps (CDSs) on U.S. debt indicate that financial markets now consider a U.S. default possible, if still highly unlikely. CDSs function much like insurance for bonds: The buyer of a CDS pays an annual premium in exchange for insurance against the possibility of default by the bond issuer. Just as the likelihood of an auto accident affects the price of auto insurance, CDS premia reflect changes in market expectations about the likelihood that a bond issuer such as a corporation or government will default. CDS rates on U.S. debt have risen from less than basis points per annum in 7 to more than basis points recently. The possibility of a technical default in which wrangling over the debt ceiling delays bond payments by a few days might produce some of the increase in CDS rates, but fears of a substantive default are also likely to have risen. Investors are much more wary of an explicit U.S. default. A country in an untenable fiscal situation can evade its debt obligations in at least two ways. The first is to default by canceling or restructuring debt. The second (and indirect) way to default is by raising the domestic price level with surprise inflation reducing the real value of nominal bonds denominated in the domestic currency. Although Federal Reserve Chairman Ben Bernanke has been steadfast in stating that the Fed will not allow inflation to rise above percent which the Fed has traditionally equated with price stability some analysts predict the Fed will use inflation to greatly reduce the real value of U.S. debt. Despite U.S. fiscal problems, the Fed appears to still retain excellent inflation credibility with financial markets. The chart shows that expected inflation from both Treasury Inflation- Protected Security (TIPS) spreads measures and professional economists forecasts seems to be well anchored near percent. Markets and forecasters appear to discount the possibility of using inflation to reduce the value of U.S. debt. Although confidence in the Fed might explain the quiescence of inflation expectations, the structure of U.S. government debt may be more important. Each year, almost percent of privately held U.S. government debt matures and must be refinanced. A surprise burst of inflation would reduce the real value of this debt but also greatly increase the cost of rolling it over and perhaps make it impossible to roll over. Furthermore, 7 percent of the U.S. debt consists of TIPS whose payments would rise commensurately with increases in the consumer price index. In other words, inflating away the U.S. debt simply would not work because a high proportion of the debt is in short-term or inflation-protected securities. Some combination of reduced spending and/or higher taxes would reduce the default risk and create a sustainable fiscal path. Christopher J. Neely Chairman Bernanke has said recently that We ve been very, very clear that we will not allow inflation to rise above two percent or less (www.clipsandcomment.com////transcript-ben-bernanke-on--minutesdecember--/) and Well, first, let me say that we re not going to be monetizing the debt (see p. of http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi? dbname=_house_hearings&docid=f:7.pdf). The short-maturity debt also includes some near-to-maturity TIPS. Expected Inflation -Year TIPS-Implied Expected Inflation -Year TIPS-Implied Expected Inflation U. of Mich. -Year Expected Inflation 7 8 9 NOTE: The chart shows three measures of expected consumer price index inflation. The TIPS measures show expected inflation that is implied by real and nominal Treasury bond yields. The Thomson Reuters/ University of Michigan survey measures consumer inflation expectations. Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org

Contents Page Monetary and Financial Indicators at a Glance Monetary Aggregates and Their Components Reserves Markets and Short-Term Credit Flows 7 Senior Loan Officer Opinion Survey on Bank Lending Practices 8 Measures of Expected Inflation 9 Interest Rates Policy-Based Inflation Indicators Implied Forward Rates, Futures Contracts, and Inflation-Indexed Securities Velocity, Gross Domestic Product, and M Bank Credit Stock Market Index and Foreign Inflation and Interest Rates Reference Tables 8 Definitions, Notes, and Sources Conventions used in this publication:. 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. For example, using consecutive months, the percent change at an annual rate in x between month t and the current month t is: [(x τ /x τ ) ]. 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 and the current month t is: [(x τ /x τ ) ]. We welcome your comments addressed to: Editor, Monetary Trends P.O. Box St. Louis, MO - or to: stlsfred@stls.frb.org 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. Monetary Trends is published monthly by the of the. Visit the s website at research.stlouisfed.org/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 research.stlouisfed.org/fred or call () -89.

updated through /8/ Monetary Trends M and MZM Billions of dollars 99 89 MZM Treasury Yield Curve Week Ending Friday: // // // 79 M 9 8 9 y 7y y y Adjusted Monetary Base change at an annual rate Real Treasury Yield Curve Week Ending Friday: // // // - - 8 9 - y 7y y y Reserve Market Rates Effective Federal Funds Rate Intended Federal Funds Rate Inflation-Indexed Treasury Yield Spreads. Week Ending Friday: // // //. Primary Credit Rate. 8 9. y 7y y y Note: Effective December, 8, FOMC reports the intended Federal Funds Rate as a range.

Monetary Trends updated through // M change from year ago 7-7 9 9 9 97 98 99 7 8 9 MZM change from year ago - 9 9 9 97 98 99 7 8 9 M change from year ago 9-9 9 9 97 98 99 7 8 9 Monetary Services Index - M** change from year ago - 9 9 9 9 9 9 97 98 99 7 8 **We will not update the MSI series until we revise the code to accomodate the discontinuation of M.

updated through // Monetary Trends Adjusted Monetary Base change from year ago 8-9 9 9 97 98 99 7 8 9 Domestic Nonfinancial Debt change from year ago Currency Held by the Nonbank Public change from year ago Federal Total - 7 8 9 8 9 Small Denomination Time Deposits* change from year ago. Checkable Deposits change from year ago.. -. -. 8 9 8 9 Money Market Mutual Fund Shares change from year ago Savings Deposits change from year ago Institutional Funds Retail Funds - 8 9 8 9

Monetary Trends updated through /9/ Adjusted and Required Reserves Billions of dollars Adjusted Required 9 9 9 97 98 99 7 8 9 Total Borrowings, nsa Billions of dollars Excess Reserves plus RCB Contracts Billions of dollars 8 7 8 9 * Data exclude term auction credit 7 8 9 Nonfinancial Commercial Paper change from year ago - - 9 9 9 97 98 99 7 8 9 As of April,, the Federal Reserve Board made major changes to its commercial paper calculations. For more information, please refer to http://www.federalreserve.gov/releases/cp/about.htm. Consumer Credit change from year ago - 9 9 9 97 98 99 7 8 9

updated through // Monetary Trends Net age of Domestic Banks Tightening Standards for Commercial and Industrial Loans age 9 Large & Medium Firms Small Firms - 9 9 9 97 98 99 7 8 9 Net age of Domestic Banks Tightening Standards for Commercial Real Estate Loans age 9-9 9 9 97 98 99 7 8 9 Net age of Domestic Banks Tightening Standards for Residential Mortgage Loans age 8-9 9 9 97 98 99 7 8 9 Net age of Domestic Banks Tightening Standards for Consumer Loans age 8 - Credit Card Loans Other Consumer Loans 9 9 9 97 98 99 7 8 9 7

Monetary Trends updated through // CPI Inflation and -Year-Ahead CPI Inflation Expectations Humphrey-Hawkins CPI Inflation Range - - CPI Inflation University of Michigan Federal Reserve Bank of Philadelphia 9 9 9 97 98 99 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. -Year Ahead PCE Inflation Expectations and Realized Inflation 8 Realized Expected 7 7 8 8 9 9 See the notes section for an explanation of the chart. Treasury Security Yield Spreads Yield to maturity Real Interest Rates, Real rate = Nominal rate less year-over-year CPI inflation -Year less -Month T-Bill - -Year less -Year Note -Year less -Month T-Bill 7 8 9 - - -Year Treasury Yield Federal Funds Rate 7 8 9 8

updated through /8/ Monetary Trends Short-Term Interest Rates 8 9-Day Commercial Paper Prime Rate -Month Treasury Yield - 9 9 9 97 98 99 7 8 9 Long-Term Interest Rates 8 Corporate Aaa Conventional Mortgage -Year Treasury Yield 9 9 9 97 98 99 7 8 9 Long-Term Interest Rates Short-Term Interest Rates 8 -Year Treasury Yield Corporate Baa 8 9 9-Day Commercial Paper -Month Treasury Yield 8 9 FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate 8 Intended Federal Funds Rate Discount Rate Primary Credit Rate 9 9 9 97 98 99 7 8 9 9

Monetary Trends updated through // Federal Funds Rate and Inflation Targets % % % % % Target Inflation Rates Actual - 7 8 9 Calculated federal funds rate is based on Taylor's rule. Components of Taylor's Rule Actual and Potential Real GDP PCE Inflation Billions of chain-weighted dollars change from year ago Potential Actual 9 7 8 9 See notes section for further explanation. - 7 8 9 Monetary Base Growth and Inflation Targets Actual Target Inflation Rates % % % % % - 7 8 9 Calculated base growth is based on McCallum's rule. Actual base growth is percent change from the previous quarter. *Actual values for 8:Q, 9:Q, and 9:Q are 88.8 percent,.77 percent, and., respectively. Monetary Base Velocity Growth Components of McCallum's Rule Real Output Growth - Recursive Average 8 -Year Moving Average - - - -Year Moving Average - Quarter to Quarter Growth Rate -7-8 7 8 9 7 8 9

updated through /8/ Implied One-Year Forward Rates 7 Week Ending: // // // y y y 7y y Monetary Trends Rates on -Month Eurodollar Futures, daily data.8. May. Apr Mar. / / /7 / / /7 / / /8 /7 Rates on Selected Federal Funds Futures Contracts, daily data.9 Rates on Federal Funds Futures on Selected Dates.9 /7/.7 Mar.7.. //. May Apr. // / / /7 / / /7 / / /8 /7 Mar Apr May Jun Jul Aug Contract Month Inflation-Indexed Treasury Securities Weekly data Inflation-Indexed Treasury Yield Spreads Weekly data..7 -.7 -. 9 Inflation-Indexed -Year Government Notes, weekly data. Note: Yields are inflation-indexed constant maturity U.S. Treasury securities Maturity..7 -.7 -. 9 Inflation-Indexed -Year Government Yield Spreads, weekly data. Horizon Note: Yield spread is between nominal and inflation-indexed constant maturity U.S. Treasury securities. U.S. U.S. 7 8 9 7 8 9 Note: Data is temporarily unavailable for the French and U.K. -Year Notes and Government Yield Spreads.

Monetary Trends updated through // Velocity Nominal GDP/MZM, Nominal GDP/M (Ratio Scale).7.. MZM. M.7.. 9 9 9 9 97 98 99 7 8 9 9 78 9 88 97 7 7 7 8 77 7 7898 8 88 Interest Rates 8 -Month T-Bill M Own MZM Own 9 9 9 9 97 98 99 7 8 9 Velocity = Nominal GDP / MZM MZM Velocity and Interest Rate Spread Ratio Scale...... 97Q to 99Q 99Q to present - 7 8 9 Interest Rate Spread = -Month T-Bill less MZM Own Rate Velocity = Nominal GDP / M M Velocity and Interest Rate Spread Ratio Scale...7.. 97Q to 99Q 99Q to present - Interest Rate Spread = -Month T-Bill less M Own Rate

updated through // Monetary Trends Gross Domestic Product change from year ago 8 - - 9 9 9 9 97 98 99 7 8 9 Dashed lines indicate -year moving averages. Real Gross Domestic Product change from year ago - - 9 9 9 9 97 98 99 7 8 9 Dashed lines indicate -year moving averages. Gross Domestic Product Price Index change from year ago 9 9 9 9 97 98 99 7 8 9 Dashed lines indicate -year moving averages. M change from year ago 9 9 9 9 9 97 98 99 7 8 9 Dashed lines indicate -year moving averages.

Monetary Trends updated through /8/ Bank Credit change from year ago - - 7 8 9 Investment Securities in Bank Credit at Commercial Banks change from year ago - 7 8 9 Total Loans and Leases in Bank Credit at Commercial Banks change from year ago - - - 7 8 9 Commercial and Industrial Loans at Commercial Banks change from year ago - - 7 8 9

updated through // Monetary Trends Standard & Poor's 8 8 Composite Index (left) 9 7 Price/Earnings Ratio (right) 9 9 9 97 98 99 7 8 9 Recent Inflation and Long-Term Interest Rates Consumer Price Inflation Rates Long-Term Government Bond Rates change from year ago Q Q Q Q Nov Dec Jan Feb United States..78...7.9.9.8 Canada...8.7...7. France........ Germany.8..8.9..9.. Italy.9...79.8..7. Japan -. -.9 -.8..... United Kingdom...9...9.7. * Copyright,, Organisation for Economic Cooperation and Development, OECD Main Economic Indicators (www.oecd.org). Inflation and Long-Term Interest Rate Differentials Canada Germany Germany Canada U.K. U.K. - - - Inflation differential = Foreign inflation less U.S. inflation Long-term rate differential = Foreign rate less U.S. rate 8 9 - Japan Japan 8 9

Monetary Trends updated through /8/ Money Stock M MZM M M* Bank Credit Adjusted Monetary Base Reserves MSI M**. 7.89 7.7 8.89 7.7 797.7 8. 9.98. 7. 7.7 7.98 798.. 8.99 8.9 9.. 8.. 878.8 78.7. 9.89... 9..777 9.8 8.. 99. 79. 9.79.. 7.8 97.89 89.. 9.7.9.. 8 8.9 87.9 7.77. 8999. 8. 9.9.. 9.8 88.87 77.. 9. 8. 9.8.. 7.79 878. 787.. 97.7 89. 8.9.. 9.7 899. 899.9. 9.9.7.7. 9 77.79 9. 8.. 9..9 8.8... 98.8 8.9. 989.77 7.9 97....88 9. 8.7. 9. 77.8 89.8.. 8.7 97. 87.9. 98.89... 98.7 977.9 87.8. 89.97 89.8 7.7.. 7.7 9. 8.8. 98.987.89 8... 7.8 9.9 8.8. 9.. 7.98.. 8.7 979.8 878.. 9.78 999. 8.99. 9 Jan 87. 98.97 87.87. 9.9 7. 89.97.. Feb 8.8 999.9 87.7. 9.98 9. 78... Mar 77.8 98.8 898.98. 9.99 8. 8.7.. Apr 9.798 9.7 89.. 99.88 787.8 99.7.. May. 9.98 8.788. 97.99 799.97 9.7.. Jun.8 9.99 8.8. 99. 7.979 8.7.. Jul.9 9.9 8.7. 99.8 9.7 8.8.. Aug. 98.9 88.7. 9.7 78.7 879.8.. Sep.778 989. 8.7. 9.8 89.7 9... Oct 79.8 98.8 88.. 8979.9 97.7.97.. Nov 79.9 979.7 8.. 9..8 8.7.. Dec 9.9 9.87 88.79. 9.8 7.9.. Jan 8.9 98. 89.8. 89.8..8.. Feb 7.88 98.97 87.. 887..9 9.9.. Mar 7.97 97.879 8.. 898.98. 9... Apr 7. 9.87 87.98. 98.9. 79... May 77.7 99.77 88.. 9.8. 9.88.. Jun 77.8 9.97 899.7. 9.9.7... Jul 7.9 97.7 8.. 9..9.87.. Aug 7. 98.8 8.8. 9...7.. Sep 77. 9. 878.7. 9.97 98. 88.9.. Oct 78. 9.7 878.9. 98.89 998.98 99... Nov 8.7 977.99 878.88. 9.8 99.9 7.7.. Dec 8. 97.9 88.9. 99. 9. 7.9. Jan 8.777 97.7 887.7. 9. 7.7 9.8. 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.

updated through /8/ Monetary Trends Federal Primary Prime Funds Credit Rate Rate -mo CDs Treasury Yields -mo -yr -yr Corporate Aaa Bonds Municipal Aaa Bonds Conventional Mortgage..9.9 7.9..8.77.79.9.. 7...8 8..7.7..... 8..9.9.9.97.9..7..8. 9..........7...7.7......9.9.9 8.8.7...9.7...9.88..9..8.7..7.89...9..9......8........8..8..8..87 9.8...8..7.7.7....8....7.9.............7.........9...9.9......7.7.9.9...9.7....8.9..8.9..9.7....8.79.8.8...9.7..8..7.8.8.. 9 Feb......7.87.7... Mar.8...7...8..7.. Apr....89...9.9.8.8. May.8...7.8.9.9...8. Jun....9.8.7.7.... Jul.....8...... Aug.....7..9..7.9. Sep......8...8.. Oct.....7..9..8.9. Nov........9.99.88. Dec......8.9..89.9 Jan......9.7..9.. Feb..9..9...9..9.99. Mar..7.....7.7.9.97. Apr..7.....8.9.9.. May..7......9.7.89. Jun.8.7....7..88.8.7. Jul.8.7....98..7.9.. Aug.9.7....78.7.9... Sep.9.7..8..7..... Oct.9.7..7..7..8... Nov.9.7..7..7.7.87... Dec.8.7....99.9..7.7 Jan.7.7..9...9..8.7. Feb..7..8..8.8..79.9 Note: All values are given as a percent at an annual rate. 7

Monetary Trends updated through // M MZM M M* change at an annual rate..9...9 7. -. 9... 8... 7.. 9.. 9.7 7.87... -... 8.. 7.9...9..8....7.8.. 8. 9..89. 9.7 8.8....7 7.8... 9.8.8.9...8 -..98..9 -.9 -.... -..7.. 9..7....7 7.7.. 9 Jan -..9 9... Feb -.8.9.9.. Mar..7 7... Apr.. -... May...9.. Jun..87.99.. Jul 7..9 -... Aug -. -. -... Sep 7.7.9.7.. Oct. -.9... Nov. -.... Dec 9.77 -... Jan -8.9-9.9-8... Feb.87. 9.9.. Mar.9-8.97 -.8.. Apr -8. -..8.. May.8..79.. Jun..9... Jul..8.7.. Aug. 8.... Sep.7 9.... Oct.9.7.9.. Nov..... Dec 7...8. Jan. -.7.8. *See table of contents for changes to the series. 8

Monetary Trends Definitions M: 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 (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 (99); the aggregate itself was proposed earlier by Motley (988). M: M plus savings deposits (including money market deposit accounts) and small-denomination (under $,) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments under $,), net of retirement accounts. M: M plus large-denomination ($, 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 nonfinancial firms. End-of-period basis. 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 (99a,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 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 (99a,, ). 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 (997). Indexes are shown for the assets included in M, with additional data at research.stlouisfed.org/msi/index.html. Note: M, 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. and.. MZM, Adjusted Monetary Base, Adjusted Reserves, and Monetary Services Index are constructed and published by the Research Division of the. Notes Page : Readers are cautioned that, since early 99, the level and growth of M 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 () and research.stlouisfed.org/aggreg/swdata.html. 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 H. Statistical Release. The Treasury Yield Curve and Real Treasury Yield Curve show constant maturity yields calculated by the U.S. Treasury for securities, 7,, 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 research.stlouisfed.org/fred/. See also Statistical Supplement to the Federal Reserve Bulletin, table.. The -year constant maturity series was discontinued by the Treasury as of February 8,. 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. Retail Money Market Mutual Funds are included in M. Institutional money market funds are not included in M. Page : 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.. Page 7: Data are reported in the Senior Loan Officer Opinion Survey on Bank Lending Practices. Page 8: Inflation Expectations measures include the quarterly Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, the monthly University of Michigan Survey Research Center s Surveys of Consumers, and the annual Federal Open Market Committee (FOMC) range as reported to the Congress in the February testimony that accompanies the Monetary Policy Report to the Congress. Beginning February, the FOMC began using the personal consumption expenditures (PCE) price index to report its inflation range; the FOMC then switched to the PCE chain-type price index excluding food and energy prices ( core ) beginning July. Accordingly, neither are shown on this graph. CPI Inflation is the percentage change from a year ago in the consumer price index for all urban consumers. Real Interest Rates are ex post measures, equal to nominal rates minus year-over-year CPI inflation. From 99 to the present the source of the long-term PCE inflation expectations data is the Federal Reserve Bank of Philadelphia s Survey of Professional Forecasters. Prior to 99, the data were obtained from the Board of Governors of the Federal Reserve System. Realized (actual) inflation is the annualized rate of change for the -quarter period that corresponds to the forecast horizon (the expectations measure). For example, in 9:Q, annualized PCE inflation over the next quarters was expected to average.7 percent. In actuality, the average annualized rate of change measured.8 percent from 9:Q to 97:Q. Thus, the vertical distance between the two lines in the chart at any point is the forecast error. Page 9: FOMC Intended Federal Funds Rate is the level (or midpoint of the range, if applicable) of the federal funds rate that the staff of the FOMC expected to be consistent with the desired degree of pressure on bank reserve positions. In recent years, the FOMC has set an explicit target for the federal funds rate. Page : 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 (99) equation f * t =. + π t + (π t π * )/ + (y t y P t )/ to five alternative target inflation rates, π * =,,,, percent, where f * t is the implied federal funds rate, π t is the previous period s inflation rate (PCE) measured on a year-over-year basis, y t is the log of the previous period s level of real gross domestic product (GDP), and y P t is the log of an estimate of the previous period s level of potential output. Potential Real GDP is estimated by the Congressional Budget Office (CBO). Monetary Base Growth and Inflation Targets shows the quarterly growth of the adjusted monetary base implied by applying McCallum s (, p. ) equation * a * Δb = Δx Δv + λ ( Δx Δx ), t t t t t * * * Δx = π + Δy t t to five alternative target inflation rates, π * =,,,, percent, where Δb t is the implied growth rate of the adjusted monetary base, Δy t * is the -year 9

Monetary Trends α moving average growth in real GDP, Δν t is the average base velocity growth (calculated recursively), Δx t is the lag growth rate of nominal GDP, and λ =.. Page : Implied One-Year Forward Rates are calculated by this Bank from Treasury constant maturity yields. Yields to maturity, R(m), for securities with m =,..., years to maturity are obtained by linear interpolation between reported yields. These yields are smoothed by fitting the regression suggested by Nelson and Siegel (987), R(m) = a + (a + a )( e m/ )/(m/) a e m/, and forward rates are calculated from these smoothed yields using equation (a) in table. of Shiller (99), f(m) = [D(m)R(m) D(m )] / [D(m) D(m )], where duration is approximated as D(m) = ( e R(m) m )/R(m). These rates are linear approximations to the true instantaneous forward rates; see Shiller (99). For a discussion of the use of forward rates as indicators of inflation expectations, see Sharpe (997). 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 -Year Government Notes shows the yield of an inflation-indexed note that is scheduled to mature in approximately (but not greater than) years. The current French note has a maturity date of 7//, the current U.K. note has a maturity date of //, and the current U.S. note has a maturity date of //. Inflation-Indexed Treasury Yield Spreads and Inflation- Indexed -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 : 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 98, the -month T-bill rates are secondary market yields. From 98 forward, rates are -month constant maturity yields. Page : 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, U.S. Depart ment of Commerce, as the ratio of GDP measured in current dollars to GDP measured in chained dollars. Page : Investment Securities are all securities held by commercial banks in both investment and trading accounts. Page : Inflation Rate Differentials are the differences between the foreign consumer price inflation rates and year-over-year changes in the U.S. all-items Consumer Price Index. Page 7: Treasury Yields are Treasury constant maturities as reported in the Board of Governors of the Federal Reserve System s H. release. Sources Agence France Trésor: French note yields. Bank of Canada: Canadian note yields. Bank of England: U.K. note yields. Board of Governors of the Federal Reserve System: Monetary aggregates and components: H. release. Bank credit and components: H.8 release. Consumer credit: G.9 release. Required reserves, excess reserves, clearing balance contracts, and discount window borrowing: H.. and H. releases. Interest rates: H. release. Nonfinancial commercial paper: Board of Governors website. Nonfinancial debt: Z. release. M own rate. Senior Loan Officer Opinion Survey on Bank Lending Practices. 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. : 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. U.S. Department of the Treasury: U.S. security yields. References Anderson, Richard G. and Robert H. Rasche (99a). A Revised Measure of the St. Louis Adjusted Monetary Base, Review, March/April, 78(), pp. -.* and (99b). Measuring the Adjusted Monetary Base in an Era of Financial Change, Review, November/ December, 78(), pp. -7.* and (). Retail Sweep Programs and Bank Reserves, 99-999, Review, January/February, 8(), pp. -7.* and, with Jeffrey Loesel (). A Reconstruction of the Federal Reserve Bank of St. Louis Adjusted Monetary Base and Reserves, Review, September/October, 8(), pp. 9-7.*, Barry E. Jones and Travis D. Nesmith (997). Special Report: The Monetary Services Indexes Project of the Federal Reserve Bank of St. Louis, Review, January/February, 79(), pp. -8.* McCallum, Bennett T. (). Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japa, Federal Reserve Bank of Richmond Economic Quarterly, vol. 8/, Winter. Motley, Brian (988). Should M Be Redefined? Federal Reserve Bank of San Francisco Economic Review, Winter, pp. -. Nelson, Charles R. and Andrew F. Siegel (987). Parsimonious Modeling of Yield Curves, Journal of Business, October, pp. 7-89. Poole, William (99). Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November, 99. Government Printing Office, Serial No. -8. Sharpe, William F. (997). Macro-Investment Analysis, on-line textbook available at www.stanford.edu/~wfsharpe/mia/mia.htm. Shiller, Robert (99). The Term Structure of Interest Rates, Handbook of Monetary Economics, vol., B. Friedman and F. Hahn, eds., pp. 7-7. Taylor, John B. (99). Discretion versus Policy Rules in Practice, Carnegie- Rochester Conference Series on Public Policy, vol. 9, pp. 9-. Note: *Available on the Internet at research.stlouisfed.org/publications/review/.