The LIBOR-OIS spread has been a closely watched

MonetaryTrends November 8 The LIBOR-OIS Spread as a Summary Indicator The LIBOR-OIS spread has been a closely watched barometer of distress in money markets for more than a year The -month London Interbank Offered Rate (LIBOR) is the interest rate at which banks borrow unsecured funds from other banks in the London wholesale money market for a period of months Alternatively, if a bank enters into an overnight indexed swap (OIS), it is entitled to receive a fixed rate of interest on a notional amount called the OIS rate In exchange, the bank agrees to pay a (compound) interest payment on the notional amount to be determined by a reference floating rate (in the United States, this is the effective federal funds rate) to the counterparty at maturity For example, suppose the -month OIS rate is percent If the geometric average of the annualized effective federal funds rate for the -month period is 191 percent, there will be a net cash inflow of $, on a principal amount of $1 million [( percent 191 percent) /1 $1 million = $,] to the bank from its counterparty A bank borrowing at the -month LIBOR rate of 1 percent that enters into a swap to receive at the -month OIS rate of percent has a borrowing cost equal to the effective federal funds rate plus 1 basis points Entering into the OIS exposes the bank to future fluctuations in the reference rate However, the bank can guarantee itself longer-term funding while still paying close to the overnight rate Because the alternative would be rolling over the funds on a daily basis at changing overnight rates, banks are willing to pay a premium This is reflected in the LIBOR-OIS spread (defined as the difference between the LIBOR rate and the OIS rate) shown in the chart In times of stress, the LIBOR, referencing a cash instrument, reflects both credit and liquidity risk, 1 but the OIS has little exposure to default risk because these contracts do not involve any initial cash flows The OIS rate is therefore an accurate measure of investor expectations of the effective federal funds rate (and hence the Fed s target) over the term of the swap, whereas LIBOR reflects credit risk and the expectation on future over night rates 1 1 Aug Oct Dec Before the onset of the turmoil in the credit markets in August 7, the LIBOR-OIS spread was around 1 basis points However, in just over a month, the spread rose to 8 basis points on September 1, 7, when the Bank of England announced emergency funding to rescue the troubled Northern Rock, one of the UK s largest mortgage lenders The spread reached its all-time high at 18 basis points on December, 7 Around the same time, large investment banks such as UBS and Lehman Brothers announced huge write-downs On March 17, 8, the collapse of Bear Stearns led to an 8-basispoint spread, a 19-basis-point increase from the previous trading day In the latest illiquidity wave following the failure of Lehman Brothers, the spread was basis points (as of October 1, 8) In short, the LIBOR-OIS spread has been the summary indicator showing the illiquidity waves that severely impaired money markets in 7 and 8 Rajdeep Sengupta and Yu Man Tam 1 Liquidity risk is the risk that a bank could not convert its assets into cash, whereas credit risk is the risk that it could fail to meet its contractual obligations Some have claimed that this distinction is unclear and that, particularly in the case of financial institutions, the definition of liquidity is elusive See von Thadden, Ernst-Ludwig Liquidity Creation Through Banks and Markets: Multiple Insurance and Limited Market Access European Economic Review, April 1999, (-), pp 991-1 Feb 7 September 1, 7 Northern Rock Crisis -Month LIBOR-OIS Spread Apr 7 Jun 7 Aug 7 December 1, 7 Bank Writedowns Oct 7 Dec 7 Feb 8 October 1, 8 Global Banking Crisis March 17, 8 Collapse of Bear Stearns Apr 8 Jun 8 Aug 8 Oct 8 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 8 Measures of Expected Inflation 9 Interest Rates 1 Policy-Based Inflation Indicators 11 Implied Forward Rates, Futures Contracts, and Inflation-Indexed Securities 1 Velocity, Gross Domestic Product, and M 1 Bank Credit 1 Stock Market Index and Foreign Inflation and Interest Rates 1 Reference Tables 18 Definitions, Notes, and Sources Conventions used in this publication: 1 Unless otherwise indicated, data are monthly Shaded areas indicate recessions, as determined by the National Bureau of Economic Research change at an annual rate is the simple, not compounded, monthly percent change multiplied by 1 For example, using consecutive months, the percent change at an annual rate in x between month t 1 and the current month t is: [(x t /x t 1 ) 1] 1 Note that this differs from National Economic Trends In that publication, monthly percent changes are compounded and expressed as annual growth rates The percent change from year ago refers to the percent change from the same period in the previous year For example, the percent change from year ago in x between month t 1 and the current month t is: [(x t /x t 1 ) 1] 1 We welcome your comments addressed to: Editor, Monetary Trends Federal Reserve Bank of St Louis PO Box St Louis, MO 1- On March,, the Board of Governors of the Federal Reserve System ceased the publication of the M monetary aggregate It also ceased publishing the following components: large-denomination time deposits, RPs, and eurodollars or to: stlsfred@stlsfrborg Monetary Trends is published monthly by the of the Federal Reserve Bank of St Louis Visit the s website at researchstlouisfedorg/publications/mt to download the current version of this publication or register for e-mail notification updates For more information on data in the publication, please visit researchstlouisfedorg/fred or call (1) -89

updated through 1/1/8 Monetary Trends M and MZM Billions of dollars 9 87 8 81 78 MZM Treasury Yield Curve Week Ending Friday: 1/19/7 9/19/8 1/17/8 7 7 9 M 7 8 7 8 9 y 7y 1y y Adjusted Monetary Base change at an annual rate 1 9 8 7 1-1 - 7 8 7 8 9 Real Treasury Yield Curve Week Ending Friday: 1/19/7 9/19/8 1/17/8 1 y 7y 1y y Reserve Market Rates 8 7 7 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate 1 7 8 7 8 9 Data available as of September 8 Federal Reserve Bank of St Louis Inflation-Indexed Treasury Yield Spreads Week Ending Friday: 1/19/7 9/19/8 1/17/8 1 1 y 7y 1y y

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

updated through 1//8 Monetary Trends Adjusted Monetary Base change from year ago 1 1-91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Domestic Nonfinancial Debt change from year ago 1 Total 1 Federal - -1 1 7 8 1 7 8 9 Currency Held by the Nonbank Public change from year ago 1 1 7 8 7 8 9 Time Deposits* change from year ago Large Denomination 1 Small Denomination 1-7 8 7 8 9 *See table of contents for changes to the series Checkable and Savings Deposits change from year ago 1 1 Savings - Checkable -1-1 7 8 7 8 9 Money Market Mutual Fund Shares change from year ago Institutional Funds 1 Retail Funds -1-7 8 7 8 9 Repurchase Agreements and Eurodollars* Billions of dollars Billions of dollars Repos (left) Eurodollars (right) 7 8 *See table of contents for changes to these series Federal Reserve Bank of St Louis

Monetary Trends updated through 1//8 M1 change at an annual rate - - - 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 *Actual values for September and October 1 are 87 and -8 percent rate, respectively MZM change at an annual rate 1-1 - 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 *Actual value for September 1 is 91 percent rate M change at an annual rate 1-1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 *Actual value for September 1 is 9 percent rate M* change at an annual rate 1-1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 *See table of contents for changes to the series Federal Reserve Bank of St Louis

updated through 1/1/8 Monetary Trends Adjusted and Required Reserves Billions of dollars 17 1 11 Adjusted 8 Required 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Total Borrowings, nsa Billions of dollars 1 1 9 1 7 8 1 7 8 9 * Data exclude term auction credit Excess Reserves plus RCB Contracts Billions of dollars 7 1 1 7 8 1 7 8 9 Nonfinancial Commercial Paper change from year ago - - - 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 As of April 1,, the Federal Reserve Board made major changes to its commercial paper calculations 7 8 9 For more information, please refer to http://wwwfederalreservegov/releases/cp/abouthtm Consumer Credit change from year ago 1 1 - -1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Federal Reserve Bank of St Louis 7

Monetary Trends updated through 1/1/8 CPI Inflation and 1-Year-Ahead CPI Inflation Expectations Humphrey-Hawkins CPI Inflation Range 1 CPI Inflation University of Michigan Federal Reserve Bank of Philadelphia 91 9 9 9 9 9 97 98 99 1 7 8 9 The shaded region shows the Humphrey-Hawkins CPI inflation range Beginning in January, the Humphrey-Hawkins inflation range was reported using the PCE price index and therefore is not shown on this graph 1-Year Ahead PCE Inflation Expectations and Realized Inflation 8 Realized Expected 7 7 8 8 9 9 Treasury Security Yield Spreads Yield to maturity Real Interest Rates, Real rate = Nominal rate less year-over-year CPI inflation 1-Year less -Month T-Bill 1-Year Treasury Yield - 1-Year less -Year Note -Year less -Month T-Bill 99 1 7 8 1999 1 7 8 9 - Federal Funds Rate - 99 1 7 8 1999 1 7 8 9 8 Federal Reserve Bank of St Louis

updated through 1/7/8 Monetary Trends Short-Term Interest Rates 1 9-Day Commercial Paper 1 1 8 Prime Rate -Month Treasury Yield 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Long-Term Interest Rates 1 11 9 Conventional Mortgage 7 Corporate Aaa 1-Year Treasury Yield 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Long-Term Interest Rates 8 Corporate Baa 7 1-Year Treasury Yield 7 8 7 8 9 Short-Term Interest Rates 1 9-Day Commercial Paper -Month Treasury Yield 7 8 7 8 9 *9-Day Commercial Paper data are not available for December, January, and July FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate 1 1 8 Intended Federal Funds Rate Discount Rate Primary Credit Rate 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Data available as of September 8 Federal Reserve Bank of St Louis 9

Monetary Trends updated through 1//8 Federal Funds Rate and Inflation Targets 1 % % % 1% % Target Inflation Rates 9 Actual 1999 1 7 8 1999 1 7 8 9 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 change from year ago 1 1 Potential 11 11 1 Actual 1 9 1 9 1999 1 7 8 1999 1 7 8 1999 1 7 8 9 1999 1 7 8 9 Monetary Base Growth* and Inflation Targets 1 Actual 9 Target Inflation Rates % 1% % % % 1999 1 7 8 99 1 7 8 9 *Modified for the effects of sweeps programs on reserve demand Calculated base growth is based on McCallum's rule Actual base growth is percent change from year ago See notes on page 19 Monetary Base Velocity Growth 8 Components of McCallum's Rule 1-Year Moving Average Real Output Growth 8 1-Year Moving Average - -Year Moving Average 1-Year Moving Average -8 1999 1 7 8 99 1 7 8 9-1999 1 7 8 99 1 7 8 9 1 Federal Reserve Bank of St Louis

updated through 1/1/8 Implied One-Year Forward Rates Week Ending: 1/19/7 9/19/8 1/17/8 Monetary Trends Rates on -Month Eurodollar Futures, daily data Oct 8 Nov 8 Dec 8 1 y y y 7y 1y 8/18 8/ 9/1 9/8 9/1 9/ 9/9 1/ 1/1 1/ Rates on Selected Federal Funds Futures Contracts, daily data 18 1 Dec 8 Oct 8 Nov 8 Rates on Federal Funds Futures on Selected Dates 17 1 1 8/1/8 9/1/8 1/17/8 1 8/18 8/ 9/1 9/8 9/1 9/ 9/9 1/ 1/1 1/ 1 Oct Nov Dec Jan Feb Mar Contract Month Inflation-Indexed Treasury Securities Weekly data Inflation-Indexed Treasury Yield Spreads Weekly data 1 1 1 Maturity 7 8 9 Note: Yields are inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Notes, weekly data 1 1 1 Horizon 7 8 9 Note: Yield spread is between nominal and inflation-indexed constant maturity US Treasury securities Inflation-Indexed 1-Year Government Yield Spreads, weekly data UK US France UK US 1 France 1 7 8 7 8 9 7 8 7 8 9 Federal Reserve Bank of St Louis 11

Monetary Trends updated through 1//8 Velocity Nominal GDP/MZM, Nominal GDP/M (Ratio Scale) 7 MZM M 17 1 91 9 9 9 9 9 97 98 99 1 7 8 11 1188 1 119 178 119 11 188 1 11 197 11 17 171 17 18 1717 17 17898 Interest Rates 1 8 -Month T-Bill M Own MZM Own 91 9 9 9 9 9 97 98 99 1 7 8 11 1188 1 119 178 119 11 188 1 11 197 11 17 171 17 18 1717 17 17898 MZM Velocity and Interest Rate Spread Ratio Scale M Velocity and Interest Rate Spread Ratio Scale Velocity = Nominal GDP / MZM 1 197Q1 to 199Q 199Q1 to present Velocity = Nominal GDP / M 17 1 1 197Q1 to 199Q 199Q1 to present 1 7 8 9 1 11 Interest Rate Spread = -Month T-Bill less MZM Own Rate 1 1 Interest Rate Spread = -Month T-Bill less M Own Rate 1 Federal Reserve Bank of St Louis

updated through 1//8 Monetary Trends Gross Domestic Product change from year ago 1 1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages Real Gross Domestic Product change from year ago 1 1-91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages Gross Domestic Product Price Index change from year ago 1 1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages M change from year ago 1 1 91 9 9 9 9 9 97 98 99 1 7 8 1991 199 199 199 199 199 1997 1998 1999 1 7 8 9 Dashed lines indicate 1-year moving averages Federal Reserve Bank of St Louis 1

Monetary Trends updated through 1/1/8 Bank Credit change from year ago 1 1 1999 1 7 8 1999 1 7 8 9 Investment Securities in Bank Credit at Commercial Banks change from year ago 1 1-1999 1 7 8 1999 1 7 8 9 Total Loans and Leases in Bank Credit at Commercial Banks change from year ago 1 1-1999 1 7 8 1999 1 7 8 9 Commercial and Industrial Loans at Commercial Banks change from year ago 1 1 - -1 1999 1 7 8 1999 1 7 8 9 1 Federal Reserve Bank of St Louis

updated through 1/1/8 Monetary Trends Standard & Poor's 1 8 1 1 1 Composite Index (left) 8 Price/Earnings Ratio (right) 18 91 9 9 9 9 9 97 98 99 1 7 8 1 Recent Inflation and Long-Term Interest Rates United States Canada France Germany Italy Japan United Kingdom Consumer Price Long-Term Inflation Rates Government Bond Rates change from year ago 7Q 7Q 8Q1 8Q Jun8 Jul8 Aug8 Sep8 1 17 9 1 1 89 9 1 1 178 7 7 17 9 7 9 9 9 9 1 7 11 9-1 9 17 17 11 17 19 178 9 8 7 1 7 7 Inflation and Long-Term Interest Rate Differentials Canada Canada UK UK - Germany Germany - Japan Japan Inflation differential = Foreign inflation less US inflation Long-term rate differential = Foreign rate less US rate - 1/1/ 1/1/ 1/1/7 7 1/1/8 8 1/1/9-1/1/ 1/1/ 1/1/7 7 1/1/8 8 1/1/9 Federal Reserve Bank of St Louis 1

Monetary Trends updated through 1//8 Money Stock M1 MZM M M* Bank Credit Adjusted Monetary Base Reserves MSI M** 178 189 979 87871 11879 798 9 119 1 98 998 9718 9 7778 919 987 17178 777 17 97877 71 88 9 9 178 991 87 177 797 8 991 7 19 71 78 877 878 9 1 1818 8919 717 719 8 99 1799 988 79797 788 887 98 17 717 817 871 81 989 188 71881 978 888 887 97 7 1 199 798 789 871 89 91 1799 787 7197 88 89918 97 1871 77118 777898 88 8 98 177 88981 7719 91718 881 99 8 1 17177 88 7791 9 819 9177 1717 897 7789 9979 89 99 1179 8718 777 98 8989 117 Sep 197 7 888 8717 811 9877 Oct 179 7811 979 87 8788 99 Nov 171 7191 97187 87 88 989 Dec 1 79 719 871 879 9197 7 Jan 17 77 78 899 89 918 Feb 179 7888 788 811 878 9 Mar 1989 7 71 819 8817 977 Apr 1777 71 717881 89 8891 9 May 178 789817 71971 87 891 977 Jun 19 778 718 817 81179 998 Jul 1898 7997 7 87 8187 9 Aug 1998 77 7898 881 87 97 Sep 188 787 7197 8987 81 9 Oct 19 79 78 97 8 9 Nov 1 81 77 91799 871 977 Dec 1 887 7 99 8787 9179 8 Jan 171 8171 7889 978 811 98 Feb 1781 8178 778 98 89 9197 Mar 171 89 71889 918 871 971 Apr 1711 8819 71 997 81 98 May 18 8719 79 918 898 991 Jun 1818 8711 78 97 8 98 Jul 1 8717 7799 99811 87 98 Aug 19 871 798 9188 871 9 Sep 191 871198 779 9771 919 197 Note: All values are given in billions of dollars *See table of contents for changes to the series **We will not update the MSI series until we revise the code to accommodate the discontinuation of M 1 Federal Reserve Bank of St Louis

updated through 1/7/8 Monetary Trends Federal Primary Prime -mo Treasury Yields Corporate Municipal Conventional Funds Credit Rate Rate CDs -mo -yr 1-yr Aaa Bonds Aaa Bonds Mortgage 11 11 1 11 1 11 7 8 1 1 1 78 7 8 1 19 19 1 1 9 9 8 8 9 9 79 1 8 77 79 9 1 1 7 8 8 7 7 1 1 7 7 8 7 9 9 91 9 79 18 8 98 7 89 8 9 87 9 8 1 8 9 8 7 1 8 1 1 8 8 91 8 87 7 8 8 1 7 7 9 818 1 7 7 7 7 7 8 1 18 7 1 9 17 9 88 9 8 7 1 7 89 9 19 1 8 1 Sep 8 9 9 7 1 87 Oct 8 7 7 1 91 Nov 8 7 81 Dec 8 97 8 7 1 7 Jan 8 11 79 7 89 Feb 8 1 1 7 7 9 9 9 Mar 8 8 1 88 1 Apr 8 1 1 9 7 99 18 May 8 1 87 9 7 7 Jun 8 7 1 79 Jul 8 9 8 7 7 Aug 1 8 9 7 79 7 Sep 9 8 99 7 8 Oct 7 77 8 1 8 Nov 9 7 97 1 1 Dec 8 7 7 1 1 9 1 8 Jan 9 8 98 8 8 1 7 1 7 Feb 98 17 19 7 9 Mar 1 79 18 18 1 1 97 Apr 8 9 8 11 8 9 May 198 17 9 88 7 Jun 7 189 8 1 8 7 Jul 1 79 1 87 1 7 Aug 79 17 7 89 8 Sep 181 9 11 9 1 Note: All values are given as a percent at an annual rate Federal Reserve Bank of St Louis 17

Monetary Trends updated through 1//8 M1 MZM M M* change at an annual rate 7 88 7 98 7 9 8 8 97 19 1 99 9 7-91 7 1 198 8 1-1 7-8 9 7 8 7 1 88 88 11 8-17 11 7-1 1 1 8 1 1 1879 9 99 1 119 9 Sep -81 7 87 Oct 1 1 89 Nov 7 77 1 Dec -91 18 97 7 Jan 7 7 79 Feb - 9 Mar 17 8 Apr 9 18 8 May -11 9 Jun -81 77 77 Jul 89 87 Aug 1 87 Sep -1 1 9 Oct 7 1 99 Nov -9 17 Dec 8 1 1 8 Jan 8 188 7 Feb 9 1 178 Mar 18 11 Apr -9 8 7 May -8 8 17 Jun 188 8 - Jul 188 1 Aug -797-17 -19 Sep 1-17 17 *See table of contents for changes to the series 18 Federal Reserve Bank of St Louis

Monetary Trends Definitions M1: The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the US Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal Reserve float MZM (money, zero maturity): M minus small-denomination time deposits, plus institutional money market mutual funds (that is, those included in M but excluded from M) The label MZM was coined by William Poole (1991); the aggregate itself was proposed earlier by Motley (1988) M: M1 plus savings deposits (including money market deposit accounts) and small-denomination (under $1,) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments under $,), net of retirement accounts M: M plus large-denomination ($1, or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank US addresses held at foreign offices of US banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $, or more) Bank Credit: All loans, leases, and securities held by commercial banks Domestic Nonfinancial Debt: Total credit market liabilities of the US Treasury, federally sponsored agencies, state and local governments, households, and nonfinancial firms End-of-period basis Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the US Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories This series is a spliced chain index; see Anderson and Rasche (199a,b, 1, ) Adjusted Reserves: The sum of vault cash and Federal Reserve Bank deposits held by depository institutions and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories This spliced chain index is numerically larger than the Board of Governors measure, which excludes vault cash not used to satisfy statutory reserve requirements and Federal Reserve Bank deposits used to satisfy required clearing balance contracts; see Anderson and Rasche (199a, 1, ) Monetary Services Index: An index that measures the flow of monetary services received by households and firms from their holdings of liquid assets; see Anderson, Jones, and Nesmith (1997) Indexes are shown for the assets included in M, with additional data at researchstlouisfedorg/msi/indexhtml Note: M1, M, M, Bank Credit, and Domestic Nonfinancial Debt are constructed and published by the Board of Governors of the Federal Reserve System For details, see Statistical Supplement to the Federal Reserve Bulletin, tables 11 and 1 MZM, Adjusted Monetary Base, Adjusted Reserves, and Monetary Services Index are constructed and published by the Research Division of the Federal Reserve Bank of St Louis Notes Page : Readers are cautioned that, since early 199, the level and growth of M1 have been depressed by retail sweep programs that reclassify transactions deposits (demand deposits and other checkable deposits) as savings deposits overnight, thereby reducing banks required reserves; see Anderson and Rasche (1) and researchstlouisfedorg/aggreg/swdatahtml Primary Credit Rate, Discount Rate, and Intended Federal Funds Rate shown in the chart Reserve Market Rates are plotted as of the date of the change, while the Effective Federal Funds Rate is plotted as of the end of the month Interest rates in the table are monthly averages from the Board of Governors H1 Statistical Release The Treasury Yield Curve and Real Treasury Yield Curve show constant maturity yields calculated by the US Treasury for securities, 7, 1, and years to maturity Inflation-Indexed Treasury Yield Spreads are a measure of inflation compensation at those horizons, and it is simply the nominal constant maturity yield less the real constant maturity yield Daily data and descriptions are available at researchstlouisfedorg/fred/ See also Statistical Supplement to the Federal Reserve Bulletin, table 1 The -year constant maturity series was discontinued by the Treasury as of February 18, Page : Checkable Deposits is the sum of demand and other checkable deposits Savings Deposits is the sum of money market deposit accounts and passbook and statement savings Time Deposits have a minimum initial maturity of 7 days Large Time Deposits are deposits of $1, or more Retail and Institutional Money Market Mutual Funds are as included in M and the non-m component of M, respectively Page 7: Excess Reserves plus RCB (Required Clearing Balance) Contracts equals the amount of deposits at Federal Reserve Banks held by depository institutions but not applied to satisfy statutory reserve requirements (This measure excludes the vault cash held by depository institutions that is not applied to satisfy statutory reserve requirements) Consumer Credit includes most short- and intermediate-term credit extended to individuals See Statistical Supplement to the Federal Reserve Bulletin, table 1 Page 8: Inflation Expectations measures include the quarterly Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, the monthly University of Michigan Survey Research Center s Surveys of Consumers, and the annual Federal Open Market Committee (FOMC) range as reported to the Congress in the February testimony that accompanies the Monetary Policy Report to the Congress Beginning February, the FOMC began using the personal consumption expenditures (PCE) price index to report its inflation range; the FOMC then switched to the PCE chain-type price index excluding food and energy prices ( core ) beginning July Accordingly, neither are shown on this graph CPI Inflation is the percentage change from a year ago in the consumer price index for all urban consumers Real Interest Rates are ex post measures, equal to nominal rates minus year-over-year CPI inflation 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 (199) equation f * t = + t 1 + ( t 1 * )/ + 1? (y t 1 y P t 1 )/ to five alternative target inflation rates, * =, 1,,, percent, where f * t is the implied federal funds rate, t 1 is the previous period s inflation rate (PCE) measured on a year-over-year basis, y t 1 is the log of the previous period s level of real gross domestic product (GDP), and y P t 1 is the log of an estimate of the previous period s level of potential output Potential Real GDP is as estimated by the Congressional Budget Office Monetary Base Growth and Inflation Targets shows the quarterly growth of the adjusted monetary base (modified to include an estimate of the effect of sweep programs) implied by applying McCallum s (1988, 199) equation MB * t = * + (1-year moving average growth of real GDP) (-year moving average of base velocity growth) to five alternative target inflation rates, * * =, 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 Federal Reserve Bank of St Louis 19

Monetary Trends ((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 reported yields These yields are smoothed by fitting the regression suggested by Nelson and Siegel (1987), R(m) = a + (a 1 + a )(1 e m/ )/(m/) a? e m/, and forward rates are calculated from these smoothed yields using equation (a) in table 11 of Shiller (199), f(m) = [D(m)R(m) D(m 1)] / [D(m) D(m 1)], where duration is approximated as D(m) = (1 e R(m)? m )/R(m) These rates are linear approximations to the true instantaneous forward rates; see Shiller (199) For a discussion of the use of forward rates as indicators of inflation expectations, see Sharpe (1997) Rates on -Month Eurodollar Futures and Rates on Selected Federal Funds Futures Contracts trace through time the yield on three specific contracts Rates on Federal Funds Futures on Selected Dates displays a single day s snapshot of yields for contracts expiring in the months shown on the horizontal axis Inflation-Indexed Treasury Securities and Yield Spreads are those plotted on page Inflation-Indexed 1-Year Government Notes shows the yield of an inflation-indexed note that is scheduled to mature in approximately (but not greater than) 1 years The current French note has a maturity date of 7//1, the current UK note has a maturity date of 8/1/1, and the current US note has a maturity date of 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 -month T-bill rates are secondary market yields From 198 forward, rates are -month constant maturity yields Page 1: Real Gross Domestic Product is GDP as measured in chained dollars The Gross Domestic Product Price Index is the implicit price deflator for GDP, which is defined by the Bureau of Economic Analysis, US Depart ment of Commerce, as the ratio of GDP measured in current dollars to GDP measured in chained dollars Page 1: Investment Securities are all securities held by commercial banks in both investment and trading accounts Page 1: Inflation Rate Differentials are the differences between the foreign consumer price inflation rates and year-over-year changes in the US all-items Consumer Price Index Page 17: Treasury Yields are Treasury constant maturities as reported in the Board of Governors of the Federal Reserve System s H1 release Sources Agence France Trésor: French note yields Bank of Canada: Canadian note yields Bank of England: UK note yields Board of Governors of the Federal Reserve System: Monetary aggregates and components: H release Bank credit and components: H8 release Consumer credit: G19 release Required reserves, excess reserves, clearing balance contracts, and discount window borrowing: H1 and H releases Interest rates: H1 release Nonfinancial commercial paper: Board of Governors website Nonfinancial debt: Z1 release M own rate Bureau of Economic Analysis: GDP Bureau of Labor Statistics: CPI Chicago Board of Trade: Federal funds futures contract Chicago Mercantile Exchange: Eurodollar futures Congressional Budget Office: Potential real GDP Federal Reserve Bank of Philadelphia: Survey of Professional Forecasters inflation expectations Federal Reserve Bank of St Louis: Adjusted monetary base and adjusted reserves, monetary services index, MZM own rate, one-year forward rates Organization for Economic Cooperation and Development: International interest and inflation rates Standard & Poor s: Stock price-earnings ratio, stock price composite index University of Michigan Survey Research Center: Median expected price change US Department of the Treasury: US security yields References Anderson, Richard G and Robert H Rasche (199a) A Revised Measure of the St Louis Adjusted Monetary Base, Federal Reserve Bank of St Louis Review, March/April, 78(), pp -1* and (199b) Measuring the Adjusted Monetary Base in an Era of Financial Change, Federal Reserve Bank of St Louis Review, November/ December, 78(), pp -7* and (1) Retail Sweep Programs and Bank Reserves, 199-1999, Federal Reserve Bank of St Louis Review, January/February, 8(1), pp 1-7* and, with Jeffrey Loesel () A Reconstruction of the Federal Reserve Bank of St Louis Adjusted Monetary Base and Reserves, Federal Reserve Bank of St Louis Review, September/October, 8(), pp 9-7*, Barry E Jones and Travis D Nesmith (1997) Special Report: The Monetary Services Indexes Project of the Federal Reserve Bank of St Louis, Federal Reserve Bank of St Louis Review, January/February, 79(1), pp 1-8* McCallum, Bennett T (1988) Robustness Properties of a Monetary Policy Rule, Carnegie-Rochester Conference Series on Public Policy, vol 9, pp 17- (199) Specification and Analysis of a Monetary Policy Rule for Japan, Bank of Japan Monetary and Economic Studies, November, pp 1- Motley, Brian (1988) Should M Be Redefined? Federal Reserve Bank of San Francisco Economic Review, Winter, pp -1 Nelson, Charles R and Andrew F Siegel (1987) Parsimonious Modeling of Yield Curves, Journal of Business, October, pp 7-89 Poole, William (1991) Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, US House of Representatives, November, 1991 Government Printing Office, Serial No 1-8 Sharpe, William F (1997) Macro-Investment Analysis, on-line textbook available at wwwstanfordedu/~wfsharpe/mia/miahtm Shiller, Robert (199) The Term Structure of Interest Rates, Handbook of Monetary Economics, vol 1, B Friedman and F Hahn, eds, pp 7-7 Taylor, John B (199) Discretion versus Policy Rules in Practice, Carnegie- Rochester Conference Series on Public Policy, vol 9, pp 19-1 Note: *Available on the Internet at researchstlouisfedorg/publications/review/ Federal Reserve Bank of St Louis