MonetaryTrends April Paul Samuelson and Monetary Analysis Paul Samuelson, who turns 9 on May 1, won the Nobel Prize in economics in 197 for the scientific work through which he has developed static and dynamic economic theory Although he is perhaps best known for his work in the field of international trade, Samuelson has described himself as the last generalist in economics, a description reflected in the fact that his collected scientific papers contain over pages of material on monetary analysis and on macroeconomic policy 1 Samuelson made a key contribution to monetary analysis as one of the earliest economists to adapt Keynesian economics to incorporate a greater role for monetary policy As Samuelson once put it, Economists of my generation have had to unlearn a lot in the sphere of monetary policy As he saw it, the initial Keynesian revolution that followed the publication of Keynes General Theory in 19 had led to the view that monetary policy was an ineffective means of influencing aggregate demand As one who lived through those times, I can testify how money got lost by economists, Samuelson observed Samuelson distinguished this 19 Model T version of Keynes from the eclectic version of Keynesianism that he developed, in which monetary policy was an important tool of demand management Reflecting this development, Samuelson wrote in 19, Contrary to the opinions of many contemporary economists (and to some of my own earlier views), I believe that monetary and credit policies have great potency to stimulate, stabilize, or depress a modern economy By the early 19s, Samuelson s economics textbook included a discussion of how monetary policy does have an important influence on the total of spending, an important development because his text was a major tool in the teaching of Keynesian economics This revision of Keynesian economics went in the direction of the counterrevolution that monetarists launched against Keynesianism Samuelson, however, played down the similarities between his views and monetarism, telling the Wall Street Journal in 19, The day I become a monetarist is the day I have lost my marbles Another contribution that Samuelson made to monetary analysis has itself been the subject of much subsequent debate and revision In 19, Samuelson and Robert Solow published an article studying the Phillips curve the relationship between inflation and unemployment in the United States The message taken by the economics profession from Samuelson and Solow s paper was that government policies that stimulated aggregate demand could buy a permanently lower unemployment rate at the cost of a higher average inflation rate Subsequent contributions by Milton Friedman and Edmund Phelps established the natural rate hypothesis, which overturned the view that there was a permanent trade-off between inflation and unemployment Defenders of Samuelson and Solow s paper point out that the authors acknowledged that changes in inflation expectations could shift the trade-off relationship, an insight that is a key component of the natural rate hypothesis But Samuelson and Solow s discussion acknowledged only that the Phillips curve could undergo shifts, not that its long-run shape was vertical, which is the most important message of the natural rate hypothesis The natural rate hypothesis, and therefore the belief in no long-run inflation/unemployment trade-off, has come to be widely accepted in the economics profession Samuelson, however, appears to have remained skeptical, reaffirming in a 197 interview that he had been warning for years that our mixed economy doesn t know how to command price stability with efficient full employment Edward Nelson 1 The Collected Scientific Papers of Paul A Samuelson, published by MIT Press in five volumes from 19 to 19, is the main source for the quotations from Samuelson given here See Blinder, Alan S Ruminations on Karl Brunner s Reflections, in RW Hafer, ed, The Monetary Versus Fiscal Policy Debate Totowa, NJ: Rowman and Allanheld, 19, pp 117- Samuelson, Paul A and Solow, Robert M Analytical Aspects of Anti-Inflation Policy American Economic Review, May 19,, pp 177- Views expressed do not necessarily reflect official positions of the Federal Reserve System researchstlouisfedorg
Contents Page Monetary and Financial Indicators at a Glance Monetary Aggregates and Their Components Monetary Aggregates: Monthly Growth 7 Reserves Markets and Short-Term Credit Flows 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 1 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- 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) -9
updated through /1/ Monetary Trends M and MZM Billions of dollars 9 1 MZM Reserve Market Rates Primary Credit Rate Effective Federal Funds Rate Intended Federal Funds Rate M 9 1 1 Discount Rate Adjusted Monetary Base change at an annual rate 1-1 Treasury Yield Curve Week Ending: /1/ /11/ /11/ 1-1 m 1y y y y 7y 1y Total Bank Credit change at an annual rate 1 Interest Rates Dec Jan Feb Federal Funds Rate 1 Prime Rate 1 9 Primary Credit Rate 1 9 Conventional Mortgage Rate 7 71 Treasury Yields: -Month Constant Maturity 7 -Month Constant Maturity 1-Year Constant Maturity 7 -Year Constant Maturity 1 9 -Year Constant Maturity 71 77 1-Year Constant Maturity 17-1 Federal Reserve Bank of St Louis
Monetary Trends updated through /1/ MZM and M1 1 1 MZM M1 - -1 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 M 1 1-9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 M 1 1-9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Monetary Services Index - M 1 1-9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Federal Reserve Bank of St Louis
updated through /1/ Monetary Trends Adjusted Monetary Base 1 1-9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Domestic Nonfinancial Debt 1 1 Total - Federal -1 1997 199 1999 1 1997 199 1999 1 Currency Held by the Nonbank Public 1 1 Time Deposits 1 1 Large Denomination - -1 Small Denomination -1 Checkable and Savings Deposits Savings 1 1 - Checkable -1-1 Money Market Mutual Fund Shares Institutional Funds 1-1 Retail Funds - Repurchase Agreements and Eurodollars Billions of dollars Billions of dollars Repos (left) Eurodollars (right) 1 Federal Reserve Bank of St Louis
Monetary Trends updated through /1/ M1 change at an annual rate - - - 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 MZM change at an annual rate 1-1 - 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 M change at an annual rate 1-1 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 M change at an annual rate 1-1 - 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Federal Reserve Bank of St Louis
updated through /1/ Monetary Trends Adjusted and Required Reserves Billions of dollars 1 1 Adjusted Required 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Total Borrowings, nsa Billions of dollars Excess Reserves plus RCB Contracts Billions of dollars 1 1 199 1999 1 199 1999 1 *Actual value for September 1 is $ billion 199 1999 1 199 1999 1 *Actual value for September 1 is $ billion Nonfinancial Commercial Paper - - 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Consumer Credit 1 1 - -1 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Federal Reserve Bank of St Louis 7
Monetary Trends updated through // Inflation and Inflation Expectations 1 Humphrey-Hawkins CPI Inflation Range Federal Reserve Bank of Philadelphia CPI Inflation University of Michigan 9 9 91 9 9 9 9 9 97 9 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 notes on page 19 Treasury Security Yield Spreads Yield to maturity 1-Year less -Month T-Bill 1-Year less -Year Note -Year less -Month T-Bill - 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Real Interest Rates, Real rate = Nominal rate less CPI inflation 1-Year Treasury Yield Federal Funds Rate - - 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Federal Reserve Bank of St Louis
updated through // Monetary Trends Short-Term Interest Rates 1 9-Day Commercial Paper 1 1 Prime Rate -Month Treasury Yield 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Long-Term Interest Rates 1 11 9 Conventional Mortgage 7 Corporate Aaa 1-Year Treasury Yield 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Long-Term Interest Rates 9 Short-Term Interest Rates 7 Corporate Baa 9-Day Commercial Paper 1-Year Treasury Yield 1 -Month Treasury Yield FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate 1 1 Discount Rate Intended Federal Funds Rate Primary Credit Rate 9 9 91 9 9 9 9 9 97 9 99 1 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Federal Reserve Bank of St Louis 9
Monetary Trends updated through /1/ Federal Funds Rate and Inflation Targets 1 % % % 1% % Target Inflation Rates 9 Actual 199 199 1997 199 1999 1 199 199 1997 199 1999 1 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 11 11 1 1 Actual 9 9 Potential 1 7 199 199 1997 199 1999 1 199 199 1997 199 1999 1 199 199 1997 199 1999 1 199 199 1997 199 1999 1 Monetary Base Growth* and Inflation Targets 1 Actual 9 Target Inflation Rates % 1% % % % 199 199 1997 199 1999 1 9 9 97 9 99 1 *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 1-Year Moving Average Components of McCallum's Rule Real Output Growth 1-Year Moving Average - - -Year Moving Average 199 199 1997 199 1999 1 9 9 97 9 99 1 1-Year Moving Average - 199 199 1997 199 1999 1 9 9 97 9 99 1 1 Federal Reserve Bank of St Louis
updated through /1/ Implied One-Year Forward Rates Week Ending: /1/ /11/ /11/ Monetary Trends Rates on -Month Eurodollar Futures, daily data May 1 9 Apr Mar y y y 7y 1y 1/1 1/17 1/ 1/1 /7 /1 /1 / /7 /1 Rates on Selected Federal Funds Futures Contracts, daily data 1 May Rates on Federal Funds Futures on Selected Dates /11/ 9 7 Apr 1/1/ /11/ Mar 1/1 1/17 1/ 1/1 /7 /1 /1 / /7 /1 Mar Apr May Jun Jul Aug Contract Month Inflation-Indexed Treasury Securities, weekly data Inflation-Indexed Treasury Yield Spreads, weekly data -Year -Year 1 1-Year 1 1-Year 1 1 1 1 1 Inflation-Indexed 1-Year Government Notes, weekly data Inflation-Indexed 1-Year Government Yield Spreads, weekly data France UK UK US 1 US 1 France 1 1 1 1 Federal Reserve Bank of St Louis 11
Monetary Trends updated through /1/ Velocity Nominal GDP/MZM, Nominal GDP/M (Ratio Scale) 7 MZM M 17 1 7 9 9 91 9 9 9 9 9 97 9 99 1 9 17 19 19 11 11 1 119 17 119 11 1 1 11 197 11 17 171 17 Interest Rates 1 -Month T-Bill M Own MZM Own 7 9 9 91 9 9 9 9 9 97 9 99 1 9 17 19 19 11 11 1 119 17 119 11 1 1 11 197 11 17 171 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 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/ Monetary Trends Gross Domestic Product 1 1 7 9 9 91 9 9 9 9 9 97 9 99 1 197 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Dashed lines indicate 1-year moving averages Real Gross Domestic Product 1 1-7 9 9 91 9 9 9 9 9 97 9 99 1 197 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Dashed lines indicate 1-year moving averages Gross Domestic Product Price Index 1 1 7 9 9 91 9 9 9 9 9 97 9 99 1 197 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Dashed lines indicate 1-year moving averages M 1 1 7 9 9 91 9 9 9 9 9 97 9 99 1 197 19 199 199 1991 199 199 199 199 199 1997 199 1999 1 Dashed lines indicate 1-year moving averages Federal Reserve Bank of St Louis 1
Monetary Trends updated through /1/ Bank Credit 1 1 199 1997 199 1999 1 199 1997 199 1999 1 Investment Securities in Bank Credit at Commercial Banks 1 1-199 1997 199 1999 1 199 1997 199 1999 1 Total Loans and Leases in Bank Credit at Commercial Banks 1 1-199 1997 199 1999 1 199 1997 199 1999 1 Commercial and Industrial Loans at Commercial Banks 1 1 - -1 199 1997 199 1999 1 199 1997 199 1999 1 1 Federal Reserve Bank of St Louis
updated through /1/ Monetary Trends Standard & Poor's 1 1 1 1 Composite Index (left) Price/Earnings Ratio (right) 1 9 9 91 9 9 9 9 9 97 9 99 1 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 Q1 Q Q Q Nov Dec Jan Feb 1 9 7 19 17 7 1 199 9 1 1 179 1 19 7 9 19 79 71-17 -7-1 1 1 1 1 7 9 1 9 1 Inflation and Long-Term Interest Rate Differentials Canada Canada UK Germany UK 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/ 1/1/ 1/1/ - 1/1/ 1/1/ 1/1/ 1/1/ 1/1/ Federal Reserve Bank of St Louis 1
Monetary Trends updated through /1/ Money Stock M1 MZM M M Bank Credit Adjusted Monetary Base Reserves MSI M 11 91 1 191 19 71 11 1 1 119 1 199 71 1 117 9 7 119 911 111 7 977 977 791 71 1 9917 777 19 77 9 7 119 19 9 99 91 771 9 7 1 117 7 19 91 19 79 11 11 97 19 9 997 97 199 119 9777 77 77 1777 7 7 17 71 97 997 1 1179 1919 1 19 9 7 9 99 171 9 991 7 199 7 917 17 1797 97 999 1 799 91 991 1717 99 79 177 1 7 91 9 1 117 77 19 9 7 71 9 17 11 7 7 917 77 91 19 19 7 17 91 7 7 97 191 17 97 9 999 797 7911 91 77 Feb 11 1999 77 97197 7 917 997 Mar 119 11 79 7 9 7 9191 1 Apr 19 7 9 79 7 79 91 199 May 1977 9717 71 1 7 917 1 Jun 197 1 171 7777 7 79 919 Jul 1777 11 77 717 1919 711 9 719 Aug 17 1 1 917 17991 7 9 11 Sep 171 1 71 97 171 79 97 119 Oct 1 1 777 97 191 7 9 9 Nov 111 991 779 7 1979 7 97 99 Dec 1977 779 77 7 71 9 99 Jan 199 9779 9 97 91 7 9 171 Feb 1791 9 111 97 1 7 97 19 Mar 19 7 11 977 1 791 997 1 Apr 119 7 919 77 99 19 May 177 97 1 9 7979 919 197 Jun 1 9 77 971 1 7797 9 1 Jul 17 9 777 97779 71 7 9 711 Aug 1 9 9 91 7 7199 9 1 Sep 17 9 9 9711 7 7 97 1 Oct 177 77 71 9 717 79199 99 9 Nov 17 1 917 99 71 79 91 1 Dec 1191 7 17 9 7771 779 9 1 Jan 11 1 9 9 79 99 7 Feb 11 999 99979 9 79997 99 979 *All values are given in billions of dollars 1 Federal Reserve Bank of St Louis
updated through /1/ Monetary Trends Federal Primary Prime -mo Treasury Yields Corporate S & L Conventional Funds Credit Rate Rate CDs -mo -yr 1-yr Aaa Bonds Aaa Bonds Mortgage 9 7 1 9 9 9 7 7 1 97 17 17 1 1 1 9 7 11 11 1 11 1 11 7 1 1 1 7 7 1 17 7 1 17 7 97 17 7 1 17 77 1 71 1 1 17 7 17 17 7 9 1 19 1 7 1 71 1 1 1 11 7 9 1 117 1 177 1 1 1 17 9 7 1 1 11 9 9 9 1 1 1 9 17 1 11 1 11 9 9 1 1 17 11 9 9 19 9 9 17 9 7 Feb 1 17 119 9 9 7 Mar 1 1 11 19 1 9 1 7 Apr 1 1 11 9 7 1 May 1 1 19 17 7 1 Jun 1 1 9 11 97 7 Jul 11 1 9 19 9 9 9 Aug 1 1 97 Sep 11 1 9 7 7 1 Oct 11 11 9 9 7 9 Nov 1 111 9 9 Dec 9 11 91 7 1 Jan 1 1 9 7 1 7 Feb 11 1 9 Mar 1 1 9 11 Apr 1 1 9 7 7 9 May 1 1 1 1 7 9 7 Jun 1 1 1 1 19 7 1 9 Jul 1 17 1 71 Aug 1 1 1 7 Sep 11 1 1 1 7 Oct 17 7 7 179 1 7 7 Nov 19 9 9 11 9 19 7 Dec 1 1 1 1 7 7 Jan 1 7 9 71 Feb 9 9 77 17 1 *All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17
Monetary Trends updated through /1/ M1 MZM M M change at an annual rate 1 1 9 9 1 1 71 11 1 77 71 9 19 1 9 111 7-91 99 1 1 71 7 1 99 7 97 1 79 77 77 7 9 1 7 7 - - -7 1 91 1 1 7 77 9 7 9 1 Feb 1 7 9 Mar 17 Apr 71 19 May 11 9 99 Jun 9 99 71 Jul 7 1 99 19 Aug 7 91 Sep - - - Oct - -1-9 Nov 1 - -9-9 Dec 71-1 7 Jan - 9 1 799 Feb 1 9 7 7 Mar 11 9 7 1 Apr 9 7 77 May 1 11 117 1171 Jun 7 1 Jul -9-1 Aug 119 9 Sep 1 Oct -1-1 71 Nov 17 Dec -7 9 7 Jan -79-11 9 Feb 7-7 1 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 (19) 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 shows constant maturity yields calculated by the US Treasury for securities with months and 1,,,, 7, and 1 years to maturity 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 1, 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 : 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 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 (19, 199) equation MB * 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 MB 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 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 Federal Reserve Bank of St Louis 19
Monetary Trends reported yields These yields are smoothed by fitting the regression suggested by Nelson and Siegel (197), 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 are yields on the most recently issued inflation-indexed securities of 1- and -year original maturities 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 /1/1, and the current US note has a maturity date of 1/1/1 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 19, the -month T-bill rates are secondary market yields From 19 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 Department 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: H 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, 7(), pp -1* and (199b) Measuring the Adjusted Monetary Base in an Era of Financial Change, Federal Reserve Bank of St Louis Review, November/ December, 7(), pp -7* and (1) Retail Sweep Programs and Bank Reserves, 199-1999, Federal Reserve Bank of St Louis Review, January/February, (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, (), 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-* McCallum, Bennett T (19) 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 (19) Should M Be Redefined? Federal Reserve Bank of San Francisco Economic Review, Winter, pp -1 Nelson, Charles R and Andrew F Siegel (197) Parsimonious Modeling of Yield Curves, Journal of Business, October, pp 7-9 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- 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