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MonetaryTrends January Open Mouth Operations: A Swiss Case Study Nearly all central banks, other than those that peg an exchange rate, now explicitly communicate policy changes through an announced target level for a short-term interest rate Notably, in 1999, the Swiss National Bank replaced its monetary base target with an operating target for the -month Swiss franc interbank lending (LIBOR) rate that the central bank adjusts as part of its strategy to maintain price stability One question that has arisen with interest rate targets is whether a central bank can cause the interest rate to move simply by expressing its intention to establish a new target level so-called open mouth operations or whether transactions of securities in the central bank s portfolio open market operations are necessary to initiate a shift in interest rates (See Thornton,, for such a study of US monetary policy in the 197s 1 ) A narrow definition of open mouth operations concerns the ability of the central bank to achieve changes in its target interest rate without corresponding open market operations A broader definition of open mouth operations, however, would include the proposition that the central bank can alter the slope of the yield curve at the very short end (at maturities between the overnight rate and months, for example) through an announcement regarding a target rate change Here we consider such a case study from the Swiss money market The Swiss National Bank targets the -month Swiss LIBOR rate, but it seeks to affect that rate by entering into securities repurchase (repo) agreements with commercial banks The typical maturity of a repo agreement is a week and the typical spread between the -month LIBOR rate and the 1-week repo rate is approximately 1 basis points Twice in, the Swiss National Bank raised its target range for the Swiss LIBOR rate by basis points The midpoint of the target range is shown on the accompanying chart The market anticipated the first target change, which accounts for the preceding spike in the LIBORrepo rate spread in June Nevertheless, money market participants did not appear to realize that the 1 Swiss National Bank sought to implement the smallest initial rise in the repo rate that would achieve their new target for the LIBOR The fact that the -month Swiss LIBOR rate immediately rose by the full basis points, while the repo rate rose by only about 1 basis points, suggests that the Swiss National Bank used open mouth operations to increase the rate spread above its usual level of 1 basis points By the time of the second target change in September, however, the Swiss National Bank did not achieve its objective of raising the Swiss LIBOR rate by basis points (to a level of 7 basis points) until it had raised the repo rate to a level of approximately basis points that is, not until the typical rate spread of about 1 basis points was restored Together, these two episodes suggest that policy announcements open mouth operations can cause rate spreads to deviate temporarily from their expected levels, although not necessarily on a regular basis or for an extended period of time Michael J Dueker and Andreas M Fischer 1 Thornton, Daniel L The Fed and Short-term Interest Rates: Is It Open Market Operations, Open Mouth or Interest Rate Smoothing Journal of Banking and Finance, March,, pp7-9 Swiss Money Market Rates -month LIBOR 7 Midpoint of target range for -month LIBOR Spread between -month LIBOR and 1-week repo Jan Mar May Jul Sep Nov 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 1/1/ Monetary Trends M and MZM Billions of dollars 9 MZM 1 M 9 1 9 1 1 Reserve Market Rates 1 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate 1 Discount Rate 1 1 Adjusted Monetary Base change at an annual rate 1-1 Treasury Yield Curve Week Ending: 1/19/ 11/19/ 1/17/ 1 1-1 1 m 1y y y y 7y 1y Total Bank Credit change at an annual rate 1 Interest Rates Sep Oct Nov Federal Funds Rate 11 17 19 Prime Rate 7 9 Primary Credit Rate 7 9 Conventional Mortgage Rate 7 7 7 Treasury Yields: -Month Constant Maturity 1 179 11 -Month Constant Maturity 191 1-Year Constant Maturity 1 -Year Constant Maturity 9 -Year Constant Maturity 1-Year Constant Maturity 1 1 19-1 1 1 Federal Reserve Bank of St Louis

Monetary Trends updated through 1/1/ MZM and M1 1 1 MZM M1 - -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 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 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 Monetary Services Index - 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 Federal Reserve Bank of St Louis

updated through 1/17/ Monetary Trends Adjusted Monetary Base 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 Domestic Nonfinancial Debt 1 1 Total - Federal -1 1997 199 1999 1 1997 199 1999 1 Currency Held by the Nonbank Public 1 1 1 1 Time Deposits 1 Large Denomination 1 - -1 Small Denomination -1 1 1 Checkable and Savings Deposits Savings 1 1 - Checkable -1-1 1 1 Money Market Mutual Fund Shares Institutional Funds 1 Retail Funds -1-1 1 Repurchase Agreements and Eurodollars Billions of dollars Billions of dollars Repos (left) Eurodollars (right) 1 1 Federal Reserve Bank of St Louis

Monetary Trends updated through 1/17/ M1 change at an annual rate - - - 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 MZM change at an annual rate 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 M change at an annual rate 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 M change at an annual rate 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 Federal Reserve Bank of St Louis

updated through 1/17/ Monetary Trends Adjusted and Required Reserves Billions of dollars 1 1 Adjusted Required 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 Total Borrowings, nsa Billions of dollars Excess Reserves plus RCB Contracts Billions of dollars 1 1 1997 199 1999 1 1997 199 1999 1 *Actual value for September 1 is $ billion 1997 199 1999 1 1997 199 1999 1 *Actual value for September 1 is $ billion Nonfinancial Commercial Paper - - 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 Consumer Credit 1 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 Federal Reserve Bank of St Louis 7

Monetary Trends updated through 1/17/ Inflation and Inflation Expectations 1 Federal Reserve Bank of Philadelphia Humphrey-Hawkins CPI Inflation Range University of Michigan CPI Inflation 7 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 - 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 Real Interest Rates, Real rate = Nominal rate less CPI inflation 1-Year Treasury Yield Federal Funds Rate - - 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 Federal Reserve Bank of St Louis

updated through 1// Monetary Trends Short-Term Interest Rates 1 9-Day Commercial Paper 1 1 Prime Rate -Month Treasury Yield 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 Long-Term Interest Rates 1 11 9 Conventional Mortgage 7 Corporate Aaa 1-Year Treasury Yield 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 Long-Term Interest Rates 9 Short-Term Interest Rates 7 Corporate Baa 9-Day Commercial Paper 1-Year Treasury Yield 1 1 -Month 1 Treasury Yield 1 1 FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate 1 1 Discount Rate Intended Federal Funds Rate Primary Credit Rate 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 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 1/1/ Implied One-Year Forward Rates Week Ending: 1/19/ 11/19/ 1/17/ y y y 7y 1y Monetary Trends Rates on -Month Eurodollar Futures, daily data 9 7 Feb Jan Dec 1/1 1/ 11/1 11/ 11/1 11/ 11/9 1/ 1/1 1/ Rates on Selected Federal Funds Futures Contracts, daily data 1 Feb Jan Dec 1/1 1/ 11/1 11/ 11/1 11/ 11/9 1/ 1/1 1/ Rates on Federal Funds Futures on Selected Dates 1/1/ 1/17/ 11/1/ Dec Jan Feb Mar Apr May Contract Month Inflation-Indexed Treasury Securities, weekly data -Year 1-Year 1 1 1 1 Inflation-Indexed Treasury Yield Spreads, weekly data -Year 1-Year 1 1 1 Inflation-Indexed 1-Year Government Notes, weekly data US France Inflation-Indexed 1-Year Government Yield Spreads, weekly data US UK UK 1 France 1 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 1/17/ Bank Credit 1 1 199 199 1997 199 1999 1 199 199 1997 199 1999 1 Investment Securities in Bank Credit at Commercial Banks 1 1-199 199 1997 199 1999 1 199 199 1997 199 1999 1 Total Loans and Leases in Bank Credit at Commercial Banks 1 1-199 199 1997 199 1999 1 199 199 1997 199 1999 1 Commercial and Industrial Loans at Commercial Banks 1 1 - -1 199 199 1997 199 1999 1 199 199 1997 199 1999 1 1 Federal Reserve Bank of St Louis

updated through 1/17/ Monetary Trends Standard & Poor's 1 1 1 1 Price/Earnings Ratio (right) 1 Composite Index (left) 7 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 Q Q1 Q Q Aug Sep Oct Nov 17 1 71 1 1 19 171 7 1 199 19 1 11 9 9 11 1 179 1 1 9 7 9 1-7 -1-1 -1 1 1 19 1 7 9 9 9 77 Inflation and Long-Term Interest Rate Differentials Canada Canada UK Germany UK Germany 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/ Japan - 1/1/1 1 1/1/ 1/1/ 1/1/ 1/1/ Federal Reserve Bank of St Louis 1

Monetary Trends updated through 1/1/ Money Stock M1 MZM M M Bank Credit Adjusted Monetary Base Reserves MSI M 1999 1111 17 77 79 77 711 977 111 9 1 1 71 11 1 1 11 1 19 7 7 117 9 71 119 919 1 77 97 977 791 71 1999 1 999 7711 119 77 9 7 1 1191 7171 997 9191 7 19 7919 117 9 99 17 9 997 97 17 1191 979 11 7 1 77 7719 1719 7 71 71 17 71 97 9 1 11999 17 111 119 99 7 9 97 17 919 7 11 7 917 177 919 177 799 91 117 1977 7 7 7 91 9 1 1 77 11977 99 71 9 17 1717 9 9 7 77 91 1991 19 19 19 91191 191 7 97 7 Nov 17 97 79 917 197 717 91 99 Dec 1171 17 7971 1 71 71 97 9 Jan 177 19117 797 1 7191 9 9917 Feb 1 199 711 171 97 7 917 99 Mar 171 1 99 1 7 7 9191 1 Apr 1 19 971 9 79 91 May 177 779 9 77 1 7 917 999 Jun 1717 7 791 7 79 919 7 Jul 177 177 1 1 19 711 9 91 Aug 119 91 1 97 19 7 9 11 Sep 11 77 7 91 1 79 97 1117 Oct 1 7 9 7 117 7 9 9 Nov 1 9 191 7 97 97 Dec 191 7 9 97 71 9 99 Jan 17 79 99 1 7 9 9 Feb 19 1 9919 9 7 97 1 Mar 177 9 117 97 179 791 997 17 Apr 11 99 19 91 77 99 177 May 1 199 91 999 19 7979 919 117 Jun 19 97 99797 7 7797 9 17 Jul 1 97 91 9797 9 7 9 1 Aug 19 1 91 99 7199 9 19 Sep 19 1 1 99 9 7 9 91 Oct 191 1 9 919 79 79199 991 7 Nov 177 19 191 9199 7 79 919 *All values are given in billions of dollars 1 Federal Reserve Bank of St Louis

updated through 1// Monetary Trends Federal Discount Primary Prime -mo Treasury Yields Corporate S & L Conventional Funds Rate Credit Rate Rate CDs -mo -yr 1-yr Aaa Bonds Aaa Bonds Mortgage 1999 97 799 7 9 7 7 7 9 7 1 9 1 9 9 7 7 1 97 17 117 17 1 1 1 9 7 11 11 1 11 1 11 7 1 17 1 7 1 17 7 97 17 1 7 1 17 77 1 71 1 1 17 1 7 17 17 7 9 1 9 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 11 1 11 9 9 1 1 17 11 9 9 Nov 1 19 1 1 77 7 Dec 1 7 1 11 1 7 Jan 1 19 119 1 17 7 9 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 71 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 *All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17

Monetary Trends updated through 1/17/ M1 MZM M M change at an annual rate 1999 11 7 7 1 1 9 9 1 179 7 119 1 77 71 1 1 9 111 7-9 9 17 7 71 9 1 97 1 1 79 9 71 1 7 9 9 7 7 - -19-11 1 1 1 9 1 971 1 7 1 7 9 Nov 9 1 Dec 1 1 9 1 Jan 17 19 Feb 1 Mar 7 Apr 71 19 May 111 7 1 77 Jun 17 9 Jul 7 17 79 19 Aug 7 9 Sep -1 - -7-1 Oct - -91-1 Nov - - - -1 Dec 9 - - Jan -7 1 79 Feb 17 77 99 9 Mar 17 11 9 11 Apr - 117 97 1 May -7 11 19 1 Jun 11 1 177 1 Jul -97-1 -1 - Aug 117 9 9 Sep 99 7 Oct -9 - - Nov 11 9 9 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 7/1/1 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

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