Increasing yet still much-debated evidence indicates the worst

MonetaryTrends October 9 A Yield Spread Perspective of the Financial Crisis Increasing yet still much-debated evidence indicates the worst of the recent financial crisis is behind us This marks the first payoff of a series of aggressive and coordinated steps by the Federal Reserve, Treasury, FDIC, and Congress to (i) stem the financial panic following the Lehman Brothers bankruptcy and (ii) restore the flow of credit Additional payoffs in the medium term are expected from the Fed s decision to cut its key policy rate to near zero and greatly expand the monetary base One of the most popular indicators of financial stress are yield spreads both default risk spreads (eg, between Baa- and AAA-grade corporate debt) and liquidity spreads (eg, between interbank deposits and Treasury bills) Low bond yields are instrumental to the goals of an expansionary policy: They stimulate growth by reducing costs of capital to firms and households 1 Yields on T-bills and notes have decreased notably in response to a number of the Fed s credit-easing policies However, transmission of monetary impulses from Treasury yields to private sector yields such as short-term interbank deposits and long-term corporate bonds may be difficult Default spreads in corporate bonds remain elevated: It has proven difficult to reduce the yields of corporate bonds with a rating below investment-grade Meanwhile, rates on deposits used to trade short-term funds have followed abnormal paths, reflecting persistent concern over borrowers solvency Do yield spreads now suggest an end to the crisis? The table lists some statistical facts for two key yield spreads The first, the 3-month London Interbank Offering Rate Overnight Index Swap (LIBOR-OIS) spread, indicates the magnitude of the liquidity premium for immediate convertibility of an asset into cash The second spread, the Moody s spread between corporate bonds with Baa and Aaa ratings, indicates the premium required to compensate for the higher default probability of bonds without an investment-grade rating (such as Baa) The mean yield spreads in the table (the coefficient γ ) suggest the means underwent substantial increases during the crisis versus the pre-crisis period with a gradual return since November 8 toward pre-crisis levels But a more careful analysis reveals a less-tranquilizing picture We have estimated simple dynamic regressions (coefficient β in the table) that capture the speed at which a shock (ie, an unpredictable change in the current level of a spread) to any of the spreads dissipates A negative β suggests that a yield spread, once shocked, will return to its long-run mean; the larger the coefficient (in absolute value), the faster the effect of the shock vanishes The table shows that so far the good news is limited to the liquidity (LIBOR-OIS) spread; β returns significantly negative and to levels close to the pre-crisis standards ( 1 vs 17), starting in late 8 However, recent developments for the default (Moody s Baa-Aaa) spread remain indecisive While in the pre-crisis period, the β estimate was small in absolute value ( 1) but highly statistically significant, during the crisis β becomes positive Even though β has returned to negative since December 8, there is little evidence that it may actually be different from zero This is consistent with some recent, substantial volatility in the US corporate bond market and leaves open the possibility that additional, future shocks to default premia may have long-lived effects Massimo Guidolin and Yu Man Tam 1 See Guidolin, Massimo and Tam, Yu Man Taming the Long-Term Spreads Federal Reserve Bank of St Louis Economic Synopses, No, May, 9; http://researchstlouisfedorg/publications/es/9/es9pdf Our estimates in the table concern three distinct subsamples: December 1 August 7 is the pre-crisis period; August 7 October 8 captures the heights of the crisis, culminating with Lehman Brothers demise in September 8 The November 8 July 9 period marks a return to normality Default Spreads Dynamics Regression coefficients Subsample α β γ (unconditional mean) R 3-Month LIBOR-OIS liquidity spread 1/1/1 8/1/7 8 17** 19** 83 8/17/1 1/17/1 8** 1 18* 318 1//8 8/31/9 1** 3** 1 Moody s Baa-Aaa default spread 1/1/1 8/1/7 1** 1** 898** 3 8/17/1 1/17/1 113** 3 18** 38 1//8 8/31/9 77** 7 1 NOTE: * and ** indicate significance at the 1 and 1 percent levels The model estimated is Δs t = α Δs t 1 + β (s t 1 γ ) + ε t, where s t is the spread at time t The dating was obtained by applying the standard Andrews-Quandt break test and selecting dates as averages of break dates for the two series Views expressed do not necessarily reflect official positions of the Federal Reserve System researchstlouisfedorg

Contents Page 3 Monetary and Financial Indicators at a Glance Monetary Aggregates and Their Components Monetary Aggregates: Monthly Growth 7 Reserves Markets and Short-Term Credit Flows 8 Measures of Expected Inflation 9 Interest Rates 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 3 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 31- On March 3,, the Board of Governors of the Federal Reserve System ceased the publication of the M3 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 (31) -89

updated through 1/1/9 Monetary Trends M and MZM Billions of dollars 1 9 9 8 MZM Treasury Yield Curve Week Ending Friday: 1/1/8 9/11/9 1/9/9 3 8 7 7 M 3 7 8 9 7 8 9 1 y 7y 1y y Adjusted Monetary Base change at an annual rate 3 1-1 Real Treasury Yield Curve Week Ending Friday: 1/1/8 3 9/11/9 1/9/9 3 1 1-7 8 9 7 8 9 1 y 7y 1y y Reserve Market Rates 8 7 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate Inflation-Indexed Treasury Yield Spreads 1 Week Ending Friday: 1/1/8 9/11/9 1/9/9 1 3 7 1 7 8 9 7 8 9 1 Note: Effective December 1, 8, FOMC reports the intended Federal Funds Rate as a range y 7y 1y y Federal Reserve Bank of St Louis 3

Monetary Trends updated through 9/11/9 MZM and M1 change from year ago 1 1 MZM M1 - -1 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 M change from year ago 1 1-9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 M3* change from year ago 1 1-91 9 93 9 9 9 97 98 99 1 3 7 8 1991 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 *See table of contents for changes to the series Monetary Services Index - M** change from year ago 1 1-91 9 93 9 9 9 97 98 99 1 3 7 8 1991 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 **We will not update the MSI series until we revise the code to accomodate the discontinuation of M3 Federal Reserve Bank of St Louis

updated through 9/11/9 Monetary Trends Adjusted Monetary Base change from year ago 1 1 8-9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Domestic Nonfinancial Debt change from year ago 3 Currency Held by the Nonbank Public change from year ago 1 1 Total Federal 1-1 3 7 8 9 3 7 8 9 1 7 8 9 7 8 9 1 Time Deposits* change from year ago 3 Large Denomination Small Denomination 1 1-7 8 9 7 8 9 1 *See table of contents for changes to the series Checkable and Savings Deposits change from year ago 3 Checkable Savings 1-1 7 8 9 7 8 9 1 Money Market Mutual Fund Shares change from year ago Institutional Funds 3 1 Retail Funds Repurchase Agreements and Eurodollars* Billions of dollars Billions of dollars Repos (left) Eurodollars (right) 3-1 7 8 9 7 8 9 1 7 8 *See table of contents for changes to these series 3 Federal Reserve Bank of St Louis

Monetary Trends updated through 9/11/9 M1 change at an annual rate 8 - - - 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 MZM change at an annual rate 3 1-1 - 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 M change at an annual rate 3 1-1 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 M3* change at an annual rate 3 1-1 91 9 93 9 9 9 97 98 99 1 3 7 8 1991 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 *See table of contents for changes to the series Federal Reserve Bank of St Louis

updated through 1/1/9 Monetary Trends Adjusted and Required Reserves Billions of dollars 1 7 Required Adjusted 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Total Borrowings, nsa Billions of dollars 3 3 1 1 3 7 8 9 3 7 8 9 1 * Data exclude term auction credit Excess Reserves plus RCB Contracts Billions of dollars 1 8 3 7 8 9 3 7 8 9 1 Nonfinancial Commercial Paper change from year ago - - - 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 As of April 1,, the Federal Reserve Board made major changes to its commercial paper calculations 7 8 9 1 For more information, please refer to http://wwwfederalreservegov/releases/cp/abouthtm Consumer Credit change from year ago 1 1 - -1 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Federal Reserve Bank of St Louis 7

Monetary Trends updated through 1//9 CPI Inflation and 1-Year-Ahead CPI Inflation Expectations Humphrey-Hawkins CPI Inflation Range 3 1-1 - CPI Inflation University of Michigan Federal Reserve Bank of Philadelphia 9 93 9 9 9 97 98 99 1 3 7 8 9 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 1-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 1-Year less 3-Month T-Bill 1-Year Treasury Yield - 1-Year less 3-Year Note 3-Year less 3-Month T-Bill 1 3 7 8 9 1 3 7 8 9 1 - Federal Funds Rate - 1 3 7 8 9 1 3 7 8 9 1 8 Federal Reserve Bank of St Louis

updated through 1//9 Monetary Trends Short-Term Interest Rates 1 1 8 Prime Rate 9-Day Commercial Paper 3-Month Treasury Yield - 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Long-Term Interest Rates 1 8 Conventional Mortgage Corporate Aaa 1-Year Treasury Yield 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Long-Term Interest Rates 1 Short-Term Interest Rates 9-Day Commercial Paper 8 Corporate Baa 3-Month Treasury Yield 1-Year Treasury Yield 7 8 9 7 8 9 1-7 8 9 7 8 9 1 *9-Day Commercial Paper data are not available for December, January, and July FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate 8 Intended Federal Funds Rate Discount Rate Primary Credit Rate 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Federal Reserve Bank of St Louis 9

Monetary Trends updated through 1/1/9 Federal Funds Rate and Inflation Targets 1 % 3% % 1% % Target Inflation Rates Actual - 1 3 7 8 9 1 3 7 8 9 1 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 1 Potential 13 11 Actual 3 1 9 1 3 7 8 9 1 3 7 8 9 1 See notes section for further explanation -1 1 3 7 8 9 1 3 7 8 9 1 Monetary Base Growth and Inflation Targets 3 1 1 Actual Target Inflation Rates % 1% % 3% % - 1 3 7 8 9 1 3 7 8 9 1 Calculated base growth is based on McCallum's rule Actual base growth is percent change from the previous quarter *Actual values for 8:Q and 9:Q1 are 18838 percent and 77 percent, respectively Monetary Base Velocity Growth 1-1 Components of McCallum's Rule Recursive Average Real Output Growth 7 1-Year Moving Average -3 - - 1-Year Moving Average - - Quarter to Quarter Growth Rate -7 1 3 7 8 9 1 3 7 8 9 1-7 1 3 7 8 9 1 3 7 8 9 1 1 Federal Reserve Bank of St Louis

updated through 1/1/9 Implied One-Year Forward Rates 3 Week Ending: 1/1/8 9/11/9 1/9/9, daily data Dec 9 Oct 9 Nov 9 Monetary Trends Rates on 3-Month Eurodollar Futures 7 1 y 3y y 7y 1y 8 8/1 8/17 8/ 8/31 9/7 9/1 9/1 9/8 1/ 1/1 Rates on Selected Federal Funds Futures Contracts, daily data 8 1 1 Dec 9 Nov 9 Oct 9 8/1 8/17 8/ 8/31 9/7 9/1 9/1 9/8 1/ 1/1 Rates on Federal Funds Futures on Selected Dates 37 9 1 13 8/7/9 9//9 1//9 Oct Nov Dec Jan Feb Mar Contract Month Inflation-Indexed Treasury Securities Weekly data Inflation-Indexed Treasury Yield Spreads Weekly data 7 17 133 1 7 1 Maturity 8 9 1 Note: Yields are inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Notes, weekly data 3 1 UK France US 7 8 9 7 8 9 1-7 1-3 7 1 Horizon 8 9 1 Note: Yield spread is between nominal and inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Yield Spreads, weekly data US UK France - 7 8 9 7 8 9 1 Federal Reserve Bank of St Louis 11

Monetary Trends updated through 9/3/9 Velocity Nominal GDP/MZM, Nominal GDP/M (Ratio Scale) 7 MZM M 17 1 1 9 93 9 9 9 97 98 99 1 3 7 8 9 1188 1 119 178 1319 131 1388 1 11 197 131 17 171 137 18 1717 173 17898 183 Interest Rates 8 3-Month T-Bill M Own MZM Own 9 93 9 9 9 97 98 99 1 3 7 8 9 1188 1 119 178 1319 131 1388 1 11 197 131 17 171 137 18 1717 173 17898 183 MZM Velocity and Interest Rate Spread Ratio Scale M Velocity and Interest Rate Spread Ratio Scale Velocity = Nominal GDP / MZM 3 3 1 197Q1 to 1993Q 199Q1 to present Velocity = Nominal GDP / M 17 1 1 197Q1 to 1993Q 199Q1 to present 1 3 7 8 9 1 11 Interest Rate Spread = 3-Month T-Bill less MZM Own Rate 1 1 3 3 Interest Rate Spread = 3-Month T-Bill less M Own Rate 1 Federal Reserve Bank of St Louis

updated through 9/3/9 Monetary Trends Gross Domestic Product change from year ago 1 8 - - 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Dashed lines indicate 1-year moving averages Real Gross Domestic Product change from year ago 3-3 - 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Dashed lines indicate 1-year moving averages Gross Domestic Product Price Index change from year ago 3 1 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Dashed lines indicate 1-year moving averages M change from year ago 1 9 3 9 93 9 9 9 97 98 99 1 3 7 8 9 199 1993 199 199 199 1997 1998 1999 1 3 7 8 9 1 Dashed lines indicate 1-year moving averages Federal Reserve Bank of St Louis 13

Monetary Trends updated through 1/1/9 Bank Credit change from year ago 1 1-1 3 7 8 9 1 3 7 8 9 1 Investment Securities in Bank Credit at Commercial Banks change from year ago 1 1-1 3 7 8 9 1 3 7 8 9 1 Total Loans and Leases in Bank Credit at Commercial Banks change from year ago 1 1-1 3 7 8 9 1 3 7 8 9 1 Commercial and Industrial Loans at Commercial Banks change from year ago 3 1-1 1 3 7 8 9 1 3 7 8 9 1 1 Federal Reserve Bank of St Louis

updated through 1//9 Monetary Trends Standard & Poor's 18 1 1 18 Composite Index (left) 1 9 7 3 Price/Earnings Ratio (right) 3 9 93 9 9 9 97 98 99 1 3 7 8 9 Recent Inflation and Long-Term Interest Rates Consumer Price Long-Term Inflation Rates Government Bond Rates change from year ago 8Q3 8Q 9Q1 9Q Jun9 Jul9 Aug9 Sep9 United States 3 13-18 -9 37 3 39 3 Canada 33 191 1 37 3 37 France 3 17 3-1 39 373 Germany 37 1 8 37 33 331 Italy 397 8 18 8 1 37 1 Japan 13-1 -98 13 139 131 United Kingdom 81 388 31 1 37 38 371 * Copyright, 9, Organisation for Economic Cooperation and Development, OECD Main Economic Indicators (wwwoecdorg) Inflation and Long-Term Interest Rate Differentials Germany Canada UK UK - Germany Canada Inflation differential = Foreign inflation less US inflation Long-term rate differential = Foreign rate less US rate - 1/1/ 1/1/7 7 1/1/8 8 1/1/9 9 1/1/1 Japan - Japan - 1/1/ 1/1/7 7 1/1/8 8 1/1/9 9 1/1/1 Federal Reserve Bank of St Louis 1

Monetary Trends updated through 1/1/9 Money Stock M1 MZM M M3* Bank Credit Adjusted Monetary Base Reserves MSI M** 13 98 73 93718 339387 7778 913 39873 137171 7781 78 97877 9833 88 9 3339 13738 9983 8111 177 797 8339 9913 7 1373 73177 781 8338 8 9181 8 191 8999 77777 9187 197 31 7 1 13931 7889 7983 8197 839 913 13733 77781 77 813 89917 933 3 1371 7717 7319 87331 87 99 1377 87719 788 87 83787 93 8 1 1387 838397 7 897 881 913 13871 811 778 8991919 898 938 3 1177 8718 778 993 891 1177 131 897711 833 93938 137 37 9 1 1379 97 878183 93313 138 877 1133 917 833 9311 17377 917 7 Aug 1377 7713 731 87387 8313 93 Sep 137197 781 73117 881 813 999 Oct 13793 797 73717 8917 8 9391 Nov 13791 88 711 87139 878 971 Dec 137981 8133 738371 8838 87 9177 8 Jan 137738 8333 787 8988 81 9 Feb 1383 871 791 89793 89 911 Mar 13833 8383 788 9888 83 977 Apr 13839 813813 7931 89711 8198 937 May 138371 8718 793 9 89 988 Jun 13937 871333 7818 98 83 93788 Jul 197 8719 777 9131 8791 979 Aug 13913 8733 79817 91391 8718 98 Sep 1119 87873 78833 91813 93177 1989 Oct 1783 8878 7979 99198 11 373 Nov 1317 898 7981 9313 1878 789 Dec 1973 91179 81371 93188 19 839379 9 Jan 179 933811 8397 997 1739 8731 Feb 193 939777 8397 931 19 788 Mar 1388 98 83397 9933 1817 833387 Apr 19383 971787 88178 9717 178789 99 May 1998 98311 8391 9331 1799387 93 Jun 138 9113 839977 93331 17131 8889 Jul 171 97 838313 9731 19371 8178 Aug 1988 93881 89787 919973 17811 8793 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 M3 1 Federal Reserve Bank of St Louis

updated through 1//9 Monetary Trends Federal Primary Prime 3-mo Treasury Yields Corporate Municipal Conventional Funds Credit Rate Rate CDs 3-mo 3-yr 1-yr Aaa Bonds Aaa Bonds Mortgage 13 3 3 1 1 78 7 3 8 31 19 19 31 31 393 9 3 8 8 9 9 79 1 8 77 79 9 1 1 7 8 8 7 7 3 3 13 3 8 193 39 9 97 139 37 3 8 7 1 8 31 1 8 8 3 391 8 3 87 7 8 8 13 37 3 7 93 818 1 73 7 7 7 37 3 3 3 8 1 318 37 1 33 9 17 3 39 88 9 33 8 7 1 7 389 3 9 3 19 3 1 3 38 31 1 131 8 3 18 3 8 87 9 1 18 3 18 17 7 7 18 3 17 19 331 1 3 3 3 1 3 3 1 1 3 7 11 1 7 Sep 9 3 83 399 7 38 Oct 7 77 8 1 3 38 Nov 9 7 97 33 33 1 1 Dec 83 733 37 313 1 9 1 8 Jan 39 8 98 38 8 1 37 33 13 7 Feb 98 3 3 17 19 37 3 9 Mar 1 3 79 18 18 31 1 3 97 Apr 8 9 8 131 3 38 9 May 198 17 9 388 7 3 Jun 7 189 38 1 8 3 Jul 1 79 1 87 1 7 3 Aug 79 17 7 389 8 Sep 181 39 11 3 39 1 Oct 97 181 3 9 18 381 8 Nov 39 1 3 19 11 33 1 83 9 Dec 1 8 31 177 3 17 17 33 9 Jan 1 3 1 13 113 Feb 3 11 3 137 87 7 13 Mar 18 3 17 131 8 7 Apr 1 3 89 1 13 93 39 8 81 May 18 3 7 18 139 39 8 Jun 1 3 39 18 17 37 1 Jul 1 3 3 18 1 3 1 3 Aug 1 3 3 17 1 39 17 19 Sep 1 3 1 18 3 13 381 Note: All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17

Monetary Trends updated through 9/11/9 M1 MZM M M3* change at an annual rate 7 383 9 3 1 97 19 33 9 7-8 9 7 8 139 87 7 1 1 78 8 981 78 3-13 13 1 18 8 8 1 13 18 837 19 139 3 87 3 98 17 9 1 93 191 18 11 33 1 7 Aug 193 1979 81 Sep - 18 Oct 3 17 3 Nov -371 118 31 Dec -173 993 39 8 Jan 38 1179 79 Feb 7 91 13 Mar 1 19 Apr 983 331 May -19 78 39 Jun 8 11 188 Jul 13 7 98 Aug -1-1 -8 Sep 1 91 1717 Oct 191 8 188 Nov 39 1 798 Dec 8 93 1 9 Jan -17 31 11 Feb -17 73 Mar 87 1113 137 Apr 3-13 -7 May 77 11 91 Jun 398 3 31 Jul 31-19 -311 Aug -3-8 -79 *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 M3 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 M3: 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, 3) 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, 3) 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, M3, 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 3: 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 13 The 3-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 M3, respectively Page 7: Excess Reserves plus RCB (Required Clearing Balance) Contracts equals the amount of deposits at Federal Reserve Banks held by depository institutions but not applied to satisfy statutory reserve requirements (This measure excludes the vault cash held by depository institutions that is not applied to satisfy statutory reserve requirements) Consumer Credit includes most short- and intermediate-term credit extended to individuals See 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 From 1991 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 1991, 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 19:Q1, annualized PCE inflation over the next quarters was expected to average 17 percent In actuality, the average annualized rate of change measured 8 percent from 19:Q1 to 197:Q1 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 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 (1993) 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,, 3, 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 estimated by the Congressional Budget Office (CBO) Since the July 9 NIPA revision, there is a discrepancy between real GDP (in billions of chained dollars) and CBO real potential GDP (in billions of chained dollars) We have multiplied each quarterly observation of CBO real potential GDP by a factor of 11 This scaling factor is the average of the ratio of real GDP in billions of chained dollars to real GDP in billions of chained dollars for the four quarters of Monetary Base Growth and Inflation Targets shows the quarterly growth of the adjusted monetary base implied by applying McCallum s (, p ) equation Federal Reserve Bank of St Louis 19

Monetary Trends * a * Δb = Δx Δv + λ ( Δx Δx ), t t t t t 1 * * * Δx = π + Δy t t to five alternative target inflation rates, π * =, 1,, 3, percent, where Δb t is the implied growth rate of the adjusted monetary base, Δy * t is the 1-year α moving average growth in real GDP, Δν t is the average base velocity growth (calculated recursively), Δx t 1 is the lag growth rate of nominal GDP, and λ = 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 131 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 3-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 3 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 8/1/13, and the current US note has a maturity date of 1/1/18 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 3-month T-bill rates are secondary market yields From 198 forward, rates are 3-month constant maturity yields Page 13: 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 H3 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 3-13* and (199b) Measuring the Adjusted Monetary Base in an Era of Financial Change, Federal Reserve Bank of St Louis Review, November/ December, 78(), pp 3-37* and (1) Retail Sweep Programs and Bank Reserves, 199-1999, Federal Reserve Bank of St Louis Review, January/February, 83(1), pp 1-7* and, with Jeffrey Loesel (3) 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 39-7*, 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 31-8* 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 8/1, Winter Motley, Brian (1988) Should M Be Redefined? Federal Reserve Bank of San Francisco Economic Review, Winter, pp 33-1 Nelson, Charles R and Andrew F Siegel (1987) Parsimonious Modeling of Yield Curves, Journal of Business, October, pp 73-89 Poole, William (1991) Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, 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 (1993) Discretion versus Policy Rules in Practice, Carnegie- Rochester Conference Series on Public Policy, vol 39, pp 19-1 Note: *Available on the Internet at researchstlouisfedorg/publications/review/ Federal Reserve Bank of St Louis