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Federal
in other checkables
shifted from all other
sources from the level of M-1B should produce adjusted figures more consistent
with
the 1981 target-growth
ranges? Specifically,
to calculate the adjusted level of M-1A each
month, the estimated
fraction shifted from
demand deposits is rnultipl ied by the monthly
change in the level of non-seasonally
adjusted
other checkable deposits, less the estimated
trend growth in thiscomponent;this
monthly
value is cumulated
and added to observed
M-l A after seasonal adjustment
by the demand-deposit
seasonal factor. To calculate
the adjusted
M-l B level, the estimated
fraction
from non-M-1B sources is multiplied by the monthly
change in the level
of non-seasonally
adjusted other checkable
deposits
in excess of trend growth; th is
monthly
value is cumulated
and, after seasonal adjustment
by the commercial-bank
savings deposit seasonal factor, subtracted
from observed M-1B.8
Although
the nationwide
authorization
of NOW accounts
on December 31, 1980,
has had a marked impact on the observed
levels of the narrow M-l aggregates, these
money measures are still useful guidelines
for policy action if allowance is made for
the unusual
deposit sh ifts. Adjusting
observed levels may be preferable to adjusting
target-growth
ranges. Development
of rei i-

7. In notation form,
M-1A~

=

M-1At

+

[.h
1=1

1-Pi)

o

(LIOC)';'DSFt,

J

M-1EJ'1.
t
where
M-1A~(M-1S<;>= the adjusted level of M-1A
(M-1B) at month (t),
M-1At(M-1B;>=
the observed level of M-1A
(M-1B) at month W,
(1-P ) = the fraction of increase in
i
other checkable deposits,
assumed to stem from demand deposits at month (i),
DSFt
the seasonal factor for
demand
deposits
and
other checkable deposits
at month (r).
NOTE: Other symbols are defined in fn. 5.

able, adjusted long-run target ranges for the
whole year will be possible only at year-end,
when the full set of actual values become
available. Although the adjusted levels of the
aggregates also incorporate
actual values, target ranges with which they can be compared
are already established for the entire year.

Target-Setting

Implications

Either
of the adjustment
alternatives
alleviates
the distortion
of the monetary
aggregates caused by introduction
of nationwide NOW accounts. This makes it possible
to compare incoming money data with the
Federal Open Market Committee targets for
the year.
Another complication
that arises in interpreting Federal Reserve policy and moneystock growth in a longer-run context is base
drift. This is the "Iet-bygones-be-bygones"
practice that bases the target-growth
range for
the current period on the actual, rather than
targeted, final value of the previous period.
While this issue may not be relevant to day-today Fed-watching,
it is meaningful for longerrun monetary policy considerations.
The 1981 targets for the narrow aggregates
incorporate
two forms of base drift. The first
is unrelated
to NOW accounts and can be
illustrated by reviewing the target ranges for
1980 and 1981. The upper limit ofthe growth
target for M-l B was 6% percent for 1980
and is 6 percent for 1981. The maximum
expansion
desirable for that aggregate over
the two years is 6.44 percent,
implying a
8. An example may be useful. In January 1981,
the observed level of M-1A was $373.3 billion;
if 77.5 percent of the $16.2-billion increase in
other checkables originated from demand deposits, then adjusted M-1A was $385.6 billion
(373.3 + [0.775 (16.2)';' 1.019)). If the remaining
22.5 percent of the increase stemmed from nonM-1B sources and the observed level of M-1B was
$416.0 billion, then adjusted M-1B was $412.3
billion (416.0 - [0.225 (16.2)) .;. 0.995). In
February, if M-1A was $366.6 billion, and 72.5
percent of the $8.6 billion non-trend growth in
other checkables came from demand deposits,
adjusted M-1A would be $385.9 billion (366.6 +
[0.775 (16.2) + 0.725 (8.6)) .;. 0.972). Similarly,
if observed M-1B was $419.0 billion in February,
then adjusted M-1B would be $412.9 billion
(419.0 - [0.225 (16.2) + 0.275 (8.6)) .;. 0.9891.

maximum 1981 :IVQ level of $434.4 billion.
However, the 1981 M-l B target is based on
the
actual
(above-target)
$412.5-billion
level of M-1B in 1980:IVQ, implying a maximum 1981:IVQlevel
of $437.3 billion, and
a growth rate over two years of 6.82 percent.
The figures used in this illustration obviously
would be different
if the calculations
were
made from the midpoint
of the announced
money-growth
ranges.
A second form of base drift has been introduced
through inclusion of a portion of
other checkable
deposits in the M-1B base
level. A portion of other checkables
represents funds shifted from sources not previously included in M-l B. One reason for
above-target
growth of M-1B in 1980 was
that other checkable deposits increased by
a significantly
larger amount than had been
anticipated
when 1980 targets were set. Because of the impending
introduction
of
NOW accounts, banks began to market ATS
accounts aggressively in the latter part of the
year, causing a greater diversion of funds
into these other checkable
M-l B accounts
than had been expected.
If approximately
one-third of the unforeseen growth of these
accounts
represented
portfol io shifts from
non-M-1B assets, then the 1980:IVQ
mea-

sured level of M-l B was distorted
in the
same way that currently
observed
M-l B
is distorted.
Removing this distortion
from
the 1980:IVQ
level of M-1B suggests that
the base on wh ich 1981 growth targets
are constructed
might as consistently
be set
at $410.6 billion rather than $412.5 billion.
This second form of base drift, like the
more familiar form, is not relevant to shortrun evaluation
of money growth relative to
annual targets. However, an understanding
of the sources of base drift is useful for interpreting
growth-rate
targets in a longerrange context.

Federal Reserve Bank of Cleveland
Research Department

BULK RATE
U.S. Postage Paid
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Permit No. 385

P.O. Box 6387
Cleveland,OH
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Reserve Bank of Cleveland,

~£Q,Qomic
Commentary

Interpreting the Ms after the NOWs
by Theresa Gwazdauskas

Conclusion
Both policymakers
and market
participants are dependent
on the accuracy
of
money-stock
data to reflect current
economic conditions. Although the introduction
of nationwide
NOW accounts
has greatly
complicated
the interpretation
ofthe moneysupply statistics and growth ranges, the distortion is likely to diminish as the introductory
phase passes. Allowance
for these
changes
is necessary
and appropriate
for
interpreting
money-supply
statistics
and
growth ranges.

Department,

P.O. Box 6387, Cleveland,

OH 44101.

May 4,1981

Reserve Bank of Cleveland

The nationwide
introduction
of negotiable order of withdrawal
(NOW) accounts
on December 31, 1980, has produced large
shifts of funds from other assets into these
interest-bearing
transaction
accounts.
The
deposit shifts distort standard money-supply
figures compiled
by the Federal
Reserve
System,
adding to the difficulty
of interpreting
money
growth.
The bulk of the
$37.5-billion
increase
in other checkable
deposits in the first four months of the year
appears to have been transferred
from regular checking accounts,
thus tending to depress growth of the narrow definition
of
money,
M-1A.1 NOW accounts
also have

eral Reserve in setting and achieving moneygrowth targets. These distortions
also pose
problems for monetary-pol icy observers and
market participants
whose decisions are influenced
by expectations
about short-run
System operations in the money market.
This Economic Commentary
examines
possible methods to help gauge and evaluate
the NOW-account
phenomenon
and its impact on the money-supply
statistics.
It is
important
to note, however, that the introduction
of NOW accounts,
and the large
shifts of funds
a sharp impact

that have resulted, has had
on the statistics. Although

adjustments
are necessary, they are bound
be less than fully satisfactory.

to

boosted
M-l B expansion,
because the remaining portion
of the increase in other
checkable
deposits
originated
in funds
previously held in savings accounts and other
instruments
not included in this aggregate.
As a result, growth of these two narrow
monetary
aggregates
has deviated
significantly from the normal patterns. Moreover,
the money-supply
measures are not directly
comparable
with figures reported for periods
prior to the introduction
of NOW accounts.
Distortions in the measurement
of the monetary aggregates pose problems for the Fed-

Because the narrower M-l aggregates are
distorted more than either M-2 or M-3, some
analysts have turned to the broader aggregates for policy insight. However, data for
M-2 are only available on a monthly
basis,
precluding
weekly
Fed-watching.
Furthermore, many of the components
of M-2 are
less controllable
by the Federal Reserve System and have tended to receive less emphasis
than the narrower
M-l transactions
aggre-

1. Other checkable deposits include ATS (automatic transfer service) accounts and NOW balances
at all depository institutions, credit union share
draft balances, and demand deposits at mutual
savingsbanks.

Theresa Gwazdauskas is an economic analyst at
the Federal ReserveBank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal ReserveSystem.

Interpreting

the Money-Supply

Figures

gates.2 Other analysts have turned to narrower aggregates such as the monetary base,
which directly reflects Federal Reserve oper-

Adjusting the Targets
Based on pre-1981 experience with NOW
accounts
in a small number of states and
nationwide
experience
with ATS accounts,
about one-th ird of the increase in other checkable deposits
(in excess of trend growth)

ations. However, the Federal Reserve does
not set targets for this variable, making it
difficult to use the base as a gu ide to anticipate
System
reactions.
Through the required reserve
The Targets
component,
the monetary base
The Federal Reserve is required by the Full Employalso reflects the NOW-accountment and Balanced Growth Act of 1978 to report rnonerelated deposit shifts. Lacking
tary-aggregate
growth objectives
or targets to Congress.
attractive broader or narrower
On February
25,1981,
growth ranges for 1980:IVOto
alternatives,
most
analysts
1981 :IVO were set at 3 percent to 5% percent for the
have continued
to focus on
narrowest
aggregate,
M-1A, which consists
of demand
the M-1 aggregates.
deposits and currency; 3Y2 percent to 6 percent for M-1 B,
The
1981
target-growth
which includes M-1A and other checkable
deposits at
ranges of 3 percent
to 5%
banks and thrift institutions;
6 percent to 9 percent for
percent
for M-1A and 3%
M-2, which includes M-1B plus overnight
RPs and Europercent to 6 percent for M-1 B
dollars, money-market-mutual
fund shares, and savings
make no allowance
for the
and small-denomination
time deposits at all depository
NOW-account-related
sh ifts in
institutions;
and 6% percent to 9% percent for M-3, the
funds. Consequently, the actuaggregate that consists of M-2 plus large-denomination
al money-supply
figures retime deposits and term RPs at all depository institutions.
ported each week cannot be
The 1981 target-growth
ranges for both of the M-1
directly related to the target
measu res represent a % percentage point reduction from
ranges without
adjusting for
the 1980 target ranges, reflecting System policy to slow
the NOW shifts. There are two
the growth of the money stock gradually
over time.
possible ways to relate current
Ranges for M-2 and M-3 remain unchanged from 1980.
money-stock
figures with the
Annual money-growth
targets provide a basis for intertarget ranges: (1) the target
preting open market operations
of the Federal Reserve
ranges may be adjusted to reSystem. Many analysts track actual money growth over
flect
incoming
information
the short term to evaluate System progress toward the
about
shifts of funds into
announced
long-run growth goals. Release of weekly and
NOWs, making the targets conmonthly money-stock
levels by the Federal Reserve theresistent with the actual path of
fore is monitored
by so-called Fed watchers, who attempt
M-1A and M-1B; or (2) M-1A
to anticipate the direction of System actions.
and M-1B levels may be adjusted on the basis of incomduring the current year might have been exing information
about shifts of funds into
pected to represent balances previously held
NOWs, making the data reported consistent
as either savings deposits or other assets not
with the path of money targets as origincluded
in the M-1B aggregate.
(Trend
inally formulated.
growth is the growth that would have been
expected in the absence of NOW accounts2. Under a reserve operating procedure, monetary
see fn. 5.) Restating the 1981 growth-target
control generally is strengthened
with aggregates
ranges to allow for the introduction
of NOW
that contain
a greater proportion
of reservable
assets. See Kenneth J. Kopecky, "The Relationship
accounts reduces the range for M-1A to -4%
between Reserve Ratios and the Monetary Aggrepercent to -2 percent because of shifts of
gates under Reserves and Federal Funds Rate Operating
Targets,"
Staff
Economic
Studies
100
(Board of Governors of the Federal Reserve System,
December 1978).

existing demand-deposit
balances to NOW
accounts; it increases the range for M-1B to
6 percent to 8% percent because of shifts of

exrstmq

savings and other

NOW accounts.3
The restatement

of the

asset balances
targets

to

depends

on forecasts
and tentative
assumptions
about the popularity
of NOW accounts.
Recent
information
based on su rvey and
sample sources, although
necessarily
qualitative, suggests that a somewhat greater portion of incoming
NOW account
funds in
early 1981 represents
transfers
from demand deposits,
perhaps 75 percent to 80
percent." If that estimate is more reliable
than the 67 percent assumption
used in the
constructi on of the restated
1981 target
ranges, then even those restated
annual
ranges may lead to misinterpretation
of
short-run
money-stock
growth
relative to
desired levels.

tive to its established growth range than to a
target range that does not assume stable
growth
in other checkable
deposits.
Th is
problem can be resolved by adjusting the targets monthly on the basis of actual increases
in other
checkable
deposits
rather
than
assuming a steady increase over the course
of the entire year.
A further
adjustment
should be made
to incorporate
incoming information
about
the portion
of other checkable
deposits
originating
from non-Mvl B sources. Actual
data measuring
the precise deposit shifts
are not available, as it is extremely difficult
to monitor
portfol io adjustments
of the
public.
Current
surveys
of depositoryinstitution
managers and households suggest
that perhaps 20 percent to 25 percent of
other checkable
deposit growth in 1981:10

Moreover,
neither
the rate of growth
resulted
from shifts in non-Mvl
of NOW accounts
nor the source of the
funds can be expected to
be steady over the year.
Actual and Adjusted M-1 B Targets and Ranges
Growth of other checkable
Billions of dollars
deposits is likely to slow
440
after the initial adjustment
to the nationwide
introduction of NOW accounts.
The unexpectedly
large increase
in the fi rst four
months of the year frontend loads the growth of
other checkable
deposits.
The monthly
target-range
levels impl ied by the annual
target ranges do not reflect
this
front-end
loading.
Without an adjustment
to
the origi nal targets, actual
M-1 B expansion in the early part of the year will appear to be more rapid rela-

B cornpo-

January

1981 the proportion

was estimated

at 22.5 percent, and in February and March
it was 27.5 percent; the percentage
is expected to rise gradually so that it reaches 33
percent
over the course of the year (the
percentage
assumed
in setting
the 1981
target ranges). To reflect this change, an adjustment
should be made to each month's
M-1 B target-range
levels.5 That is, the restated target level for M-1 B in any month,
quarter, or year is equal to the original target (3Y2 percent to 6 percent for M-1B), plus
the portion of the growth of NOW accounts
that is estimated
to have been transferred
from non-M-1B sources since 1980:IVO.
In
January
1981,
for example,
the lower
boundary of the M-1 B long-run target range
at 3% percent
was $414.9
billion; nonseasonally
trend adjusted other checkables
grew $16.2 billion. If 22.5 percent of this
increase came from non-lvl- l B balances, then
adding this portion,
after seasonal adjustment, would make the appropriate
lower
end of the M-1 B target range for January
$418.6
billion.6
In February
boundary of the M-1 B long-run

the lower
target range

was $416.1 bi IIion, non-seasonally
adjusted
other
checkables
grew $7.9 billion,
and

430

5. This may be done

by using the formula

RTM-18

420

+ [~Pi·

t

410

= TM-18

t

-;- SSFt,

where
RTM-18

the restated
M-1 B target
level at month (r},

t

-

400

Actual

f:-::'::~ Adjusted

M-1B
target

-~

-

Adjusted M-1B
Original target

TM-18
t
P.
I

390

(60Ci~

below:

o

N

D

J

FMAMJJASOND

1980

3. See Monetary Policy Objectives for 1981,
Summary of Report to the Congress on Monetary
Policy pursuant
to the Full Employment
and
Balanced Growth Act of 1978. Presented by Paul
A. Volcker,
Chairman,
Federal
Reserve Board,
February 25-26, 1981.
4. See "New Seasonal Adjustment,"
Federal Reserve Statistical Release H.6 (508), May 1, 1981.

1981

60Ci

nents, such as savings deposits.
Available

data suggest that the proportion

of the increase in other checkable deposits
(in excess of trend growth) originating from
non-M-1 B sources has increased since early
in the year, much as was expected.
In

SSFt

=

range

the original
M-1 B target range
level at month tr),
the fraction of increase in other
checkable
deposits,
assumed
to
stem
from
non-M-1 B sources
at month (i),
the monthly
increase
in nonseasonally
adjusted
other checkable deposits in excess of trend in
month (i), where ;=1 is January
1981.
Non-seasonally
adjusted
trend growth
in January
1981
was $0 mill ion; in February,
-$700
million; in March, $300
million; in April, $900 million,
the
seasonal
factor
for commercial-bank
savings deposits
in
month (r).

trend growth amounted to -$700 million. If
27.5 percent of the trend-adjusted
increase
came from non-Mvl B balances, then adding
the January
and February
portions,
after
seasonal adjustment,
to targets would make
the appropriate
lower end of the M-1 B target
range $422.1 bill ion.
Target-growth
levels are adjusted
for
past months as data become available. Restated target levels for the remainder of the
year can be estimated
from assumptions
about the unknown parameters-the
portion
of the increase in other checkable
deposits
from non-M-1B sources and the increase in
other checkables
in excess of trend. If the
proportion
of the increase in other checkabies stemming from demand deposits over
the 12-month
period is still expected
to
average 33 percent,
and the expected
increase in other checkable deposits over the
year is that assumed in the adjusted Humphrey-Hawkins
target ranges, then the adjusted M-1 B target-range
levels should converge to the endpoints
of the 6 percent to
8% percent range.

Adjusting the Money-Supply Figures
A second method for evaluating current
money-stock
data is to adjust actual moneystock levels for the estimated
impact of
NOW-account-rel ated deposi t sh ifts and to
use those adjusted levels to gauge growth
relative to the 3 percent to 5% percent and
3Y2 percent to 6 percent target ranges for
M-1 A and M-1 B, respectively.
Observed
money numbers since the beginning of the
year overstate
M-1B and understate
M-1A
relative to their levels before January
1.
Adding the increase in other checkable deposits sh ifted from demand deposits to the
M-1 A aggregate or subtracting
the increase

6. Some difficulty
arises in seasonally adjusting
other
checkable
deposits,
because those funds
originate
from various
sources.
The estimated
portion from demand deposits is added to demand
deposits and divided by the demand-deposit
and
other
checkable
deposits
seasonal-adjustment
factor; the estimated portion from savings deposits
is divided by the commercial-bank
savings deposits
seasonal-adjustment
factor.

gates.2 Other analysts have turned to narrower aggregates such as the monetary base,
which directly reflects Federal Reserve oper-

Adjusting the Targets
Based on pre-1981 experience with NOW
accounts
in a small number of states and
nationwide
experience
with ATS accounts,
about one-th ird of the increase in other checkable deposits
(in excess of trend growth)

ations. However, the Federal Reserve does
not set targets for this variable, making it
difficult to use the base as a gu ide to anticipate
System
reactions.
Through the required reserve
The Targets
component,
the monetary base
The Federal Reserve is required by the Full Employalso reflects the NOW-accountment and Balanced Growth Act of 1978 to report rnonerelated deposit shifts. Lacking
tary-aggregate
growth objectives
or targets to Congress.
attractive broader or narrower
On February
25,1981,
growth ranges for 1980:IVOto
alternatives,
most
analysts
1981 :IVO were set at 3 percent to 5% percent for the
have continued
to focus on
narrowest
aggregate,
M-1A, which consists
of demand
the M-1 aggregates.
deposits and currency; 3Y2 percent to 6 percent for M-1 B,
The
1981
target-growth
which includes M-1A and other checkable
deposits at
ranges of 3 percent
to 5%
banks and thrift institutions;
6 percent to 9 percent for
percent
for M-1A and 3%
M-2, which includes M-1B plus overnight
RPs and Europercent to 6 percent for M-1 B
dollars, money-market-mutual
fund shares, and savings
make no allowance
for the
and small-denomination
time deposits at all depository
NOW-account-related
sh ifts in
institutions;
and 6% percent to 9% percent for M-3, the
funds. Consequently, the actuaggregate that consists of M-2 plus large-denomination
al money-supply
figures retime deposits and term RPs at all depository institutions.
ported each week cannot be
The 1981 target-growth
ranges for both of the M-1
directly related to the target
measu res represent a % percentage point reduction from
ranges without
adjusting for
the 1980 target ranges, reflecting System policy to slow
the NOW shifts. There are two
the growth of the money stock gradually
over time.
possible ways to relate current
Ranges for M-2 and M-3 remain unchanged from 1980.
money-stock
figures with the
Annual money-growth
targets provide a basis for intertarget ranges: (1) the target
preting open market operations
of the Federal Reserve
ranges may be adjusted to reSystem. Many analysts track actual money growth over
flect
incoming
information
the short term to evaluate System progress toward the
about
shifts of funds into
announced
long-run growth goals. Release of weekly and
NOWs, making the targets conmonthly money-stock
levels by the Federal Reserve theresistent with the actual path of
fore is monitored
by so-called Fed watchers, who attempt
M-1A and M-1B; or (2) M-1A
to anticipate the direction of System actions.
and M-1B levels may be adjusted on the basis of incomduring the current year might have been exing information
about shifts of funds into
pected to represent balances previously held
NOWs, making the data reported consistent
as either savings deposits or other assets not
with the path of money targets as origincluded
in the M-1B aggregate.
(Trend
inally formulated.
growth is the growth that would have been
expected in the absence of NOW accounts2. Under a reserve operating procedure, monetary
see fn. 5.) Restating the 1981 growth-target
control generally is strengthened
with aggregates
ranges to allow for the introduction
of NOW
that contain
a greater proportion
of reservable
assets. See Kenneth J. Kopecky, "The Relationship
accounts reduces the range for M-1A to -4%
between Reserve Ratios and the Monetary Aggrepercent to -2 percent because of shifts of
gates under Reserves and Federal Funds Rate Operating
Targets,"
Staff
Economic
Studies
100
(Board of Governors of the Federal Reserve System,
December 1978).

existing demand-deposit
balances to NOW
accounts; it increases the range for M-1B to
6 percent to 8% percent because of shifts of

exrstmq

savings and other

NOW accounts.3
The restatement

of the

asset balances
targets

to

depends

on forecasts
and tentative
assumptions
about the popularity
of NOW accounts.
Recent
information
based on su rvey and
sample sources, although
necessarily
qualitative, suggests that a somewhat greater portion of incoming
NOW account
funds in
early 1981 represents
transfers
from demand deposits,
perhaps 75 percent to 80
percent." If that estimate is more reliable
than the 67 percent assumption
used in the
constructi on of the restated
1981 target
ranges, then even those restated
annual
ranges may lead to misinterpretation
of
short-run
money-stock
growth
relative to
desired levels.

tive to its established growth range than to a
target range that does not assume stable
growth
in other checkable
deposits.
Th is
problem can be resolved by adjusting the targets monthly on the basis of actual increases
in other
checkable
deposits
rather
than
assuming a steady increase over the course
of the entire year.
A further
adjustment
should be made
to incorporate
incoming information
about
the portion
of other checkable
deposits
originating
from non-Mvl B sources. Actual
data measuring
the precise deposit shifts
are not available, as it is extremely difficult
to monitor
portfol io adjustments
of the
public.
Current
surveys
of depositoryinstitution
managers and households suggest
that perhaps 20 percent to 25 percent of
other checkable
deposit growth in 1981:10

Moreover,
neither
the rate of growth
resulted
from shifts in non-Mvl
of NOW accounts
nor the source of the
funds can be expected to
be steady over the year.
Actual and Adjusted M-1 B Targets and Ranges
Growth of other checkable
Billions of dollars
deposits is likely to slow
440
after the initial adjustment
to the nationwide
introduction of NOW accounts.
The unexpectedly
large increase
in the fi rst four
months of the year frontend loads the growth of
other checkable
deposits.
The monthly
target-range
levels impl ied by the annual
target ranges do not reflect
this
front-end
loading.
Without an adjustment
to
the origi nal targets, actual
M-1 B expansion in the early part of the year will appear to be more rapid rela-

B cornpo-

January

1981 the proportion

was estimated

at 22.5 percent, and in February and March
it was 27.5 percent; the percentage
is expected to rise gradually so that it reaches 33
percent
over the course of the year (the
percentage
assumed
in setting
the 1981
target ranges). To reflect this change, an adjustment
should be made to each month's
M-1 B target-range
levels.5 That is, the restated target level for M-1 B in any month,
quarter, or year is equal to the original target (3Y2 percent to 6 percent for M-1B), plus
the portion of the growth of NOW accounts
that is estimated
to have been transferred
from non-M-1B sources since 1980:IVO.
In
January
1981,
for example,
the lower
boundary of the M-1 B long-run target range
at 3% percent
was $414.9
billion; nonseasonally
trend adjusted other checkables
grew $16.2 billion. If 22.5 percent of this
increase came from non-lvl- l B balances, then
adding this portion,
after seasonal adjustment, would make the appropriate
lower
end of the M-1 B target range for January
$418.6
billion.6
In February
boundary of the M-1 B long-run

the lower
target range

was $416.1 bi IIion, non-seasonally
adjusted
other
checkables
grew $7.9 billion,
and

430

5. This may be done

by using the formula

RTM-18

420

+ [~Pi·

t

410

= TM-18

t

-;- SSFt,

where
RTM-18

the restated
M-1 B target
level at month (r},

t

-

400

Actual

f:-::'::~ Adjusted

M-1B
target

-~

-

Adjusted M-1B
Original target

TM-18
t
P.
I

390

(60Ci~

below:

o

N

D

J

FMAMJJASOND

1980

3. See Monetary Policy Objectives for 1981,
Summary of Report to the Congress on Monetary
Policy pursuant
to the Full Employment
and
Balanced Growth Act of 1978. Presented by Paul
A. Volcker,
Chairman,
Federal
Reserve Board,
February 25-26, 1981.
4. See "New Seasonal Adjustment,"
Federal Reserve Statistical Release H.6 (508), May 1, 1981.

1981

60Ci

nents, such as savings deposits.
Available

data suggest that the proportion

of the increase in other checkable deposits
(in excess of trend growth) originating from
non-M-1 B sources has increased since early
in the year, much as was expected.
In

SSFt

=

range

the original
M-1 B target range
level at month tr),
the fraction of increase in other
checkable
deposits,
assumed
to
stem
from
non-M-1 B sources
at month (i),
the monthly
increase
in nonseasonally
adjusted
other checkable deposits in excess of trend in
month (i), where ;=1 is January
1981.
Non-seasonally
adjusted
trend growth
in January
1981
was $0 mill ion; in February,
-$700
million; in March, $300
million; in April, $900 million,
the
seasonal
factor
for commercial-bank
savings deposits
in
month (r).

trend growth amounted to -$700 million. If
27.5 percent of the trend-adjusted
increase
came from non-Mvl B balances, then adding
the January
and February
portions,
after
seasonal adjustment,
to targets would make
the appropriate
lower end of the M-1 B target
range $422.1 bill ion.
Target-growth
levels are adjusted
for
past months as data become available. Restated target levels for the remainder of the
year can be estimated
from assumptions
about the unknown parameters-the
portion
of the increase in other checkable
deposits
from non-M-1B sources and the increase in
other checkables
in excess of trend. If the
proportion
of the increase in other checkabies stemming from demand deposits over
the 12-month
period is still expected
to
average 33 percent,
and the expected
increase in other checkable deposits over the
year is that assumed in the adjusted Humphrey-Hawkins
target ranges, then the adjusted M-1 B target-range
levels should converge to the endpoints
of the 6 percent to
8% percent range.

Adjusting the Money-Supply Figures
A second method for evaluating current
money-stock
data is to adjust actual moneystock levels for the estimated
impact of
NOW-account-rel ated deposi t sh ifts and to
use those adjusted levels to gauge growth
relative to the 3 percent to 5% percent and
3Y2 percent to 6 percent target ranges for
M-1 A and M-1 B, respectively.
Observed
money numbers since the beginning of the
year overstate
M-1B and understate
M-1A
relative to their levels before January
1.
Adding the increase in other checkable deposits sh ifted from demand deposits to the
M-1 A aggregate or subtracting
the increase

6. Some difficulty
arises in seasonally adjusting
other
checkable
deposits,
because those funds
originate
from various
sources.
The estimated
portion from demand deposits is added to demand
deposits and divided by the demand-deposit
and
other
checkable
deposits
seasonal-adjustment
factor; the estimated portion from savings deposits
is divided by the commercial-bank
savings deposits
seasonal-adjustment
factor.

gates.2 Other analysts have turned to narrower aggregates such as the monetary base,
which directly reflects Federal Reserve oper-

Adjusting the Targets
Based on pre-1981 experience with NOW
accounts
in a small number of states and
nationwide
experience
with ATS accounts,
about one-th ird of the increase in other checkable deposits
(in excess of trend growth)

ations. However, the Federal Reserve does
not set targets for this variable, making it
difficult to use the base as a gu ide to anticipate
System
reactions.
Through the required reserve
The Targets
component,
the monetary base
The Federal Reserve is required by the Full Employalso reflects the NOW-accountment and Balanced Growth Act of 1978 to report rnonerelated deposit shifts. Lacking
tary-aggregate
growth objectives
or targets to Congress.
attractive broader or narrower
On February
25,1981,
growth ranges for 1980:IVOto
alternatives,
most
analysts
1981 :IVO were set at 3 percent to 5% percent for the
have continued
to focus on
narrowest
aggregate,
M-1A, which consists
of demand
the M-1 aggregates.
deposits and currency; 3Y2 percent to 6 percent for M-1 B,
The
1981
target-growth
which includes M-1A and other checkable
deposits at
ranges of 3 percent
to 5%
banks and thrift institutions;
6 percent to 9 percent for
percent
for M-1A and 3%
M-2, which includes M-1B plus overnight
RPs and Europercent to 6 percent for M-1 B
dollars, money-market-mutual
fund shares, and savings
make no allowance
for the
and small-denomination
time deposits at all depository
NOW-account-related
sh ifts in
institutions;
and 6% percent to 9% percent for M-3, the
funds. Consequently, the actuaggregate that consists of M-2 plus large-denomination
al money-supply
figures retime deposits and term RPs at all depository institutions.
ported each week cannot be
The 1981 target-growth
ranges for both of the M-1
directly related to the target
measu res represent a % percentage point reduction from
ranges without
adjusting for
the 1980 target ranges, reflecting System policy to slow
the NOW shifts. There are two
the growth of the money stock gradually
over time.
possible ways to relate current
Ranges for M-2 and M-3 remain unchanged from 1980.
money-stock
figures with the
Annual money-growth
targets provide a basis for intertarget ranges: (1) the target
preting open market operations
of the Federal Reserve
ranges may be adjusted to reSystem. Many analysts track actual money growth over
flect
incoming
information
the short term to evaluate System progress toward the
about
shifts of funds into
announced
long-run growth goals. Release of weekly and
NOWs, making the targets conmonthly money-stock
levels by the Federal Reserve theresistent with the actual path of
fore is monitored
by so-called Fed watchers, who attempt
M-1A and M-1B; or (2) M-1A
to anticipate the direction of System actions.
and M-1B levels may be adjusted on the basis of incomduring the current year might have been exing information
about shifts of funds into
pected to represent balances previously held
NOWs, making the data reported consistent
as either savings deposits or other assets not
with the path of money targets as origincluded
in the M-1B aggregate.
(Trend
inally formulated.
growth is the growth that would have been
expected in the absence of NOW accounts2. Under a reserve operating procedure, monetary
see fn. 5.) Restating the 1981 growth-target
control generally is strengthened
with aggregates
ranges to allow for the introduction
of NOW
that contain
a greater proportion
of reservable
assets. See Kenneth J. Kopecky, "The Relationship
accounts reduces the range for M-1A to -4%
between Reserve Ratios and the Monetary Aggrepercent to -2 percent because of shifts of
gates under Reserves and Federal Funds Rate Operating
Targets,"
Staff
Economic
Studies
100
(Board of Governors of the Federal Reserve System,
December 1978).

existing demand-deposit
balances to NOW
accounts; it increases the range for M-1B to
6 percent to 8% percent because of shifts of

exrstmq

savings and other

NOW accounts.3
The restatement

of the

asset balances
targets

to

depends

on forecasts
and tentative
assumptions
about the popularity
of NOW accounts.
Recent
information
based on su rvey and
sample sources, although
necessarily
qualitative, suggests that a somewhat greater portion of incoming
NOW account
funds in
early 1981 represents
transfers
from demand deposits,
perhaps 75 percent to 80
percent." If that estimate is more reliable
than the 67 percent assumption
used in the
constructi on of the restated
1981 target
ranges, then even those restated
annual
ranges may lead to misinterpretation
of
short-run
money-stock
growth
relative to
desired levels.

tive to its established growth range than to a
target range that does not assume stable
growth
in other checkable
deposits.
Th is
problem can be resolved by adjusting the targets monthly on the basis of actual increases
in other
checkable
deposits
rather
than
assuming a steady increase over the course
of the entire year.
A further
adjustment
should be made
to incorporate
incoming information
about
the portion
of other checkable
deposits
originating
from non-Mvl B sources. Actual
data measuring
the precise deposit shifts
are not available, as it is extremely difficult
to monitor
portfol io adjustments
of the
public.
Current
surveys
of depositoryinstitution
managers and households suggest
that perhaps 20 percent to 25 percent of
other checkable
deposit growth in 1981:10

Moreover,
neither
the rate of growth
resulted
from shifts in non-Mvl
of NOW accounts
nor the source of the
funds can be expected to
be steady over the year.
Actual and Adjusted M-1 B Targets and Ranges
Growth of other checkable
Billions of dollars
deposits is likely to slow
440
after the initial adjustment
to the nationwide
introduction of NOW accounts.
The unexpectedly
large increase
in the fi rst four
months of the year frontend loads the growth of
other checkable
deposits.
The monthly
target-range
levels impl ied by the annual
target ranges do not reflect
this
front-end
loading.
Without an adjustment
to
the origi nal targets, actual
M-1 B expansion in the early part of the year will appear to be more rapid rela-

B cornpo-

January

1981 the proportion

was estimated

at 22.5 percent, and in February and March
it was 27.5 percent; the percentage
is expected to rise gradually so that it reaches 33
percent
over the course of the year (the
percentage
assumed
in setting
the 1981
target ranges). To reflect this change, an adjustment
should be made to each month's
M-1 B target-range
levels.5 That is, the restated target level for M-1 B in any month,
quarter, or year is equal to the original target (3Y2 percent to 6 percent for M-1B), plus
the portion of the growth of NOW accounts
that is estimated
to have been transferred
from non-M-1B sources since 1980:IVO.
In
January
1981,
for example,
the lower
boundary of the M-1 B long-run target range
at 3% percent
was $414.9
billion; nonseasonally
trend adjusted other checkables
grew $16.2 billion. If 22.5 percent of this
increase came from non-lvl- l B balances, then
adding this portion,
after seasonal adjustment, would make the appropriate
lower
end of the M-1 B target range for January
$418.6
billion.6
In February
boundary of the M-1 B long-run

the lower
target range

was $416.1 bi IIion, non-seasonally
adjusted
other
checkables
grew $7.9 billion,
and

430

5. This may be done

by using the formula

RTM-18

420

+ [~Pi·

t

410

= TM-18

t

-;- SSFt,

where
RTM-18

the restated
M-1 B target
level at month (r},

t

-

400

Actual

f:-::'::~ Adjusted

M-1B
target

-~

-

Adjusted M-1B
Original target

TM-18
t
P.
I

390

(60Ci~

below:

o

N

D

J

FMAMJJASOND

1980

3. See Monetary Policy Objectives for 1981,
Summary of Report to the Congress on Monetary
Policy pursuant
to the Full Employment
and
Balanced Growth Act of 1978. Presented by Paul
A. Volcker,
Chairman,
Federal
Reserve Board,
February 25-26, 1981.
4. See "New Seasonal Adjustment,"
Federal Reserve Statistical Release H.6 (508), May 1, 1981.

1981

60Ci

nents, such as savings deposits.
Available

data suggest that the proportion

of the increase in other checkable deposits
(in excess of trend growth) originating from
non-M-1 B sources has increased since early
in the year, much as was expected.
In

SSFt

=

range

the original
M-1 B target range
level at month tr),
the fraction of increase in other
checkable
deposits,
assumed
to
stem
from
non-M-1 B sources
at month (i),
the monthly
increase
in nonseasonally
adjusted
other checkable deposits in excess of trend in
month (i), where ;=1 is January
1981.
Non-seasonally
adjusted
trend growth
in January
1981
was $0 mill ion; in February,
-$700
million; in March, $300
million; in April, $900 million,
the
seasonal
factor
for commercial-bank
savings deposits
in
month (r).

trend growth amounted to -$700 million. If
27.5 percent of the trend-adjusted
increase
came from non-Mvl B balances, then adding
the January
and February
portions,
after
seasonal adjustment,
to targets would make
the appropriate
lower end of the M-1 B target
range $422.1 bill ion.
Target-growth
levels are adjusted
for
past months as data become available. Restated target levels for the remainder of the
year can be estimated
from assumptions
about the unknown parameters-the
portion
of the increase in other checkable
deposits
from non-M-1B sources and the increase in
other checkables
in excess of trend. If the
proportion
of the increase in other checkabies stemming from demand deposits over
the 12-month
period is still expected
to
average 33 percent,
and the expected
increase in other checkable deposits over the
year is that assumed in the adjusted Humphrey-Hawkins
target ranges, then the adjusted M-1 B target-range
levels should converge to the endpoints
of the 6 percent to
8% percent range.

Adjusting the Money-Supply Figures
A second method for evaluating current
money-stock
data is to adjust actual moneystock levels for the estimated
impact of
NOW-account-rel ated deposi t sh ifts and to
use those adjusted levels to gauge growth
relative to the 3 percent to 5% percent and
3Y2 percent to 6 percent target ranges for
M-1 A and M-1 B, respectively.
Observed
money numbers since the beginning of the
year overstate
M-1B and understate
M-1A
relative to their levels before January
1.
Adding the increase in other checkable deposits sh ifted from demand deposits to the
M-1 A aggregate or subtracting
the increase

6. Some difficulty
arises in seasonally adjusting
other
checkable
deposits,
because those funds
originate
from various
sources.
The estimated
portion from demand deposits is added to demand
deposits and divided by the demand-deposit
and
other
checkable
deposits
seasonal-adjustment
factor; the estimated portion from savings deposits
is divided by the commercial-bank
savings deposits
seasonal-adjustment
factor.

Federal
in other checkables
shifted from all other
sources from the level of M-1B should produce adjusted figures more consistent
with
the 1981 target-growth
ranges? Specifically,
to calculate the adjusted level of M-1A each
month, the estimated
fraction shifted from
demand deposits is rnultipl ied by the monthly
change in the level of non-seasonally
adjusted
other checkable deposits, less the estimated
trend growth in thiscomponent;this
monthly
value is cumulated
and added to observed
M-l A after seasonal adjustment
by the demand-deposit
seasonal factor. To calculate
the adjusted
M-l B level, the estimated
fraction
from non-M-1B sources is multiplied by the monthly
change in the level
of non-seasonally
adjusted other checkable
deposits
in excess of trend growth; th is
monthly
value is cumulated
and, after seasonal adjustment
by the commercial-bank
savings deposit seasonal factor, subtracted
from observed M-1B.8
Although
the nationwide
authorization
of NOW accounts
on December 31, 1980,
has had a marked impact on the observed
levels of the narrow M-l aggregates, these
money measures are still useful guidelines
for policy action if allowance is made for
the unusual
deposit sh ifts. Adjusting
observed levels may be preferable to adjusting
target-growth
ranges. Development
of rei i-

7. In notation form,
M-1A~

=

M-1At

+

[.h
1=1

1-Pi)

o

(LIOC)';'DSFt,

J

M-1EJ'1.
t
where
M-1A~(M-1S<;>= the adjusted level of M-1A
(M-1B) at month (t),
M-1At(M-1B;>=
the observed level of M-1A
(M-1B) at month W,
(1-P ) = the fraction of increase in
i
other checkable deposits,
assumed to stem from demand deposits at month (i),
DSFt
the seasonal factor for
demand
deposits
and
other checkable deposits
at month (r).
NOTE: Other symbols are defined in fn. 5.

able, adjusted long-run target ranges for the
whole year will be possible only at year-end,
when the full set of actual values become
available. Although the adjusted levels of the
aggregates also incorporate
actual values, target ranges with which they can be compared
are already established for the entire year.

Target-Setting

Implications

Either
of the adjustment
alternatives
alleviates
the distortion
of the monetary
aggregates caused by introduction
of nationwide NOW accounts. This makes it possible
to compare incoming money data with the
Federal Open Market Committee targets for
the year.
Another complication
that arises in interpreting Federal Reserve policy and moneystock growth in a longer-run context is base
drift. This is the "Iet-bygones-be-bygones"
practice that bases the target-growth
range for
the current period on the actual, rather than
targeted, final value of the previous period.
While this issue may not be relevant to day-today Fed-watching,
it is meaningful for longerrun monetary policy considerations.
The 1981 targets for the narrow aggregates
incorporate
two forms of base drift. The first
is unrelated
to NOW accounts and can be
illustrated by reviewing the target ranges for
1980 and 1981. The upper limit ofthe growth
target for M-l B was 6% percent for 1980
and is 6 percent for 1981. The maximum
expansion
desirable for that aggregate over
the two years is 6.44 percent,
implying a
8. An example may be useful. In January 1981,
the observed level of M-1A was $373.3 billion;
if 77.5 percent of the $16.2-billion increase in
other checkables originated from demand deposits, then adjusted M-1A was $385.6 billion
(373.3 + [0.775 (16.2)';' 1.019)). If the remaining
22.5 percent of the increase stemmed from nonM-1B sources and the observed level of M-1B was
$416.0 billion, then adjusted M-1B was $412.3
billion (416.0 - [0.225 (16.2)) .;. 0.995). In
February, if M-1A was $366.6 billion, and 72.5
percent of the $8.6 billion non-trend growth in
other checkables came from demand deposits,
adjusted M-1A would be $385.9 billion (366.6 +
[0.775 (16.2) + 0.725 (8.6)) .;. 0.972). Similarly,
if observed M-1B was $419.0 billion in February,
then adjusted M-1B would be $412.9 billion
(419.0 - [0.225 (16.2) + 0.275 (8.6)) .;. 0.9891.

maximum 1981 :IVQ level of $434.4 billion.
However, the 1981 M-l B target is based on
the
actual
(above-target)
$412.5-billion
level of M-1B in 1980:IVQ, implying a maximum 1981:IVQlevel
of $437.3 billion, and
a growth rate over two years of 6.82 percent.
The figures used in this illustration obviously
would be different
if the calculations
were
made from the midpoint
of the announced
money-growth
ranges.
A second form of base drift has been introduced
through inclusion of a portion of
other checkable
deposits in the M-1B base
level. A portion of other checkables
represents funds shifted from sources not previously included in M-l B. One reason for
above-target
growth of M-1B in 1980 was
that other checkable deposits increased by
a significantly
larger amount than had been
anticipated
when 1980 targets were set. Because of the impending
introduction
of
NOW accounts, banks began to market ATS
accounts aggressively in the latter part of the
year, causing a greater diversion of funds
into these other checkable
M-l B accounts
than had been expected.
If approximately
one-third of the unforeseen growth of these
accounts
represented
portfol io shifts from
non-M-1B assets, then the 1980:IVQ
mea-

sured level of M-l B was distorted
in the
same way that currently
observed
M-l B
is distorted.
Removing this distortion
from
the 1980:IVQ
level of M-1B suggests that
the base on wh ich 1981 growth targets
are constructed
might as consistently
be set
at $410.6 billion rather than $412.5 billion.
This second form of base drift, like the
more familiar form, is not relevant to shortrun evaluation
of money growth relative to
annual targets. However, an understanding
of the sources of base drift is useful for interpreting
growth-rate
targets in a longerrange context.

Federal Reserve Bank of Cleveland
Research Department

BULK RATE
U.S. Postage Paid
Cleveland,OH
Permit No. 385

P.O. Box 6387
Cleveland,OH
44101

Address

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~£Q,Qomic
Commentary

Interpreting the Ms after the NOWs
by Theresa Gwazdauskas

Conclusion
Both policymakers
and market
participants are dependent
on the accuracy
of
money-stock
data to reflect current
economic conditions. Although the introduction
of nationwide
NOW accounts
has greatly
complicated
the interpretation
ofthe moneysupply statistics and growth ranges, the distortion is likely to diminish as the introductory
phase passes. Allowance
for these
changes
is necessary
and appropriate
for
interpreting
money-supply
statistics
and
growth ranges.

Department,

P.O. Box 6387, Cleveland,

OH 44101.

May 4,1981

Reserve Bank of Cleveland

The nationwide
introduction
of negotiable order of withdrawal
(NOW) accounts
on December 31, 1980, has produced large
shifts of funds from other assets into these
interest-bearing
transaction
accounts.
The
deposit shifts distort standard money-supply
figures compiled
by the Federal
Reserve
System,
adding to the difficulty
of interpreting
money
growth.
The bulk of the
$37.5-billion
increase
in other checkable
deposits in the first four months of the year
appears to have been transferred
from regular checking accounts,
thus tending to depress growth of the narrow definition
of
money,
M-1A.1 NOW accounts
also have

eral Reserve in setting and achieving moneygrowth targets. These distortions
also pose
problems for monetary-pol icy observers and
market participants
whose decisions are influenced
by expectations
about short-run
System operations in the money market.
This Economic Commentary
examines
possible methods to help gauge and evaluate
the NOW-account
phenomenon
and its impact on the money-supply
statistics.
It is
important
to note, however, that the introduction
of NOW accounts,
and the large
shifts of funds
a sharp impact

that have resulted, has had
on the statistics. Although

adjustments
are necessary, they are bound
be less than fully satisfactory.

to

boosted
M-l B expansion,
because the remaining portion
of the increase in other
checkable
deposits
originated
in funds
previously held in savings accounts and other
instruments
not included in this aggregate.
As a result, growth of these two narrow
monetary
aggregates
has deviated
significantly from the normal patterns. Moreover,
the money-supply
measures are not directly
comparable
with figures reported for periods
prior to the introduction
of NOW accounts.
Distortions in the measurement
of the monetary aggregates pose problems for the Fed-

Because the narrower M-l aggregates are
distorted more than either M-2 or M-3, some
analysts have turned to the broader aggregates for policy insight. However, data for
M-2 are only available on a monthly
basis,
precluding
weekly
Fed-watching.
Furthermore, many of the components
of M-2 are
less controllable
by the Federal Reserve System and have tended to receive less emphasis
than the narrower
M-l transactions
aggre-

1. Other checkable deposits include ATS (automatic transfer service) accounts and NOW balances
at all depository institutions, credit union share
draft balances, and demand deposits at mutual
savingsbanks.

Theresa Gwazdauskas is an economic analyst at
the Federal ReserveBank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal ReserveSystem.

Interpreting

the Money-Supply

Figures

Federal
in other checkables
shifted from all other
sources from the level of M-1B should produce adjusted figures more consistent
with
the 1981 target-growth
ranges? Specifically,
to calculate the adjusted level of M-1A each
month, the estimated
fraction shifted from
demand deposits is rnultipl ied by the monthly
change in the level of non-seasonally
adjusted
other checkable deposits, less the estimated
trend growth in thiscomponent;this
monthly
value is cumulated
and added to observed
M-l A after seasonal adjustment
by the demand-deposit
seasonal factor. To calculate
the adjusted
M-l B level, the estimated
fraction
from non-M-1B sources is multiplied by the monthly
change in the level
of non-seasonally
adjusted other checkable
deposits
in excess of trend growth; th is
monthly
value is cumulated
and, after seasonal adjustment
by the commercial-bank
savings deposit seasonal factor, subtracted
from observed M-1B.8
Although
the nationwide
authorization
of NOW accounts
on December 31, 1980,
has had a marked impact on the observed
levels of the narrow M-l aggregates, these
money measures are still useful guidelines
for policy action if allowance is made for
the unusual
deposit sh ifts. Adjusting
observed levels may be preferable to adjusting
target-growth
ranges. Development
of rei i-

7. In notation form,
M-1A~

=

M-1At

+

[.h
1=1

1-Pi)

o

(LIOC)';'DSFt,

J

M-1EJ'1.
t
where
M-1A~(M-1S<;>= the adjusted level of M-1A
(M-1B) at month (t),
M-1At(M-1B;>=
the observed level of M-1A
(M-1B) at month W,
(1-P ) = the fraction of increase in
i
other checkable deposits,
assumed to stem from demand deposits at month (i),
DSFt
the seasonal factor for
demand
deposits
and
other checkable deposits
at month (r).
NOTE: Other symbols are defined in fn. 5.

able, adjusted long-run target ranges for the
whole year will be possible only at year-end,
when the full set of actual values become
available. Although the adjusted levels of the
aggregates also incorporate
actual values, target ranges with which they can be compared
are already established for the entire year.

Target-Setting

Implications

Either
of the adjustment
alternatives
alleviates
the distortion
of the monetary
aggregates caused by introduction
of nationwide NOW accounts. This makes it possible
to compare incoming money data with the
Federal Open Market Committee targets for
the year.
Another complication
that arises in interpreting Federal Reserve policy and moneystock growth in a longer-run context is base
drift. This is the "Iet-bygones-be-bygones"
practice that bases the target-growth
range for
the current period on the actual, rather than
targeted, final value of the previous period.
While this issue may not be relevant to day-today Fed-watching,
it is meaningful for longerrun monetary policy considerations.
The 1981 targets for the narrow aggregates
incorporate
two forms of base drift. The first
is unrelated
to NOW accounts and can be
illustrated by reviewing the target ranges for
1980 and 1981. The upper limit ofthe growth
target for M-l B was 6% percent for 1980
and is 6 percent for 1981. The maximum
expansion
desirable for that aggregate over
the two years is 6.44 percent,
implying a
8. An example may be useful. In January 1981,
the observed level of M-1A was $373.3 billion;
if 77.5 percent of the $16.2-billion increase in
other checkables originated from demand deposits, then adjusted M-1A was $385.6 billion
(373.3 + [0.775 (16.2)';' 1.019)). If the remaining
22.5 percent of the increase stemmed from nonM-1B sources and the observed level of M-1B was
$416.0 billion, then adjusted M-1B was $412.3
billion (416.0 - [0.225 (16.2)) .;. 0.995). In
February, if M-1A was $366.6 billion, and 72.5
percent of the $8.6 billion non-trend growth in
other checkables came from demand deposits,
adjusted M-1A would be $385.9 billion (366.6 +
[0.775 (16.2) + 0.725 (8.6)) .;. 0.972). Similarly,
if observed M-1B was $419.0 billion in February,
then adjusted M-1B would be $412.9 billion
(419.0 - [0.225 (16.2) + 0.275 (8.6)) .;. 0.9891.

maximum 1981 :IVQ level of $434.4 billion.
However, the 1981 M-l B target is based on
the
actual
(above-target)
$412.5-billion
level of M-1B in 1980:IVQ, implying a maximum 1981:IVQlevel
of $437.3 billion, and
a growth rate over two years of 6.82 percent.
The figures used in this illustration obviously
would be different
if the calculations
were
made from the midpoint
of the announced
money-growth
ranges.
A second form of base drift has been introduced
through inclusion of a portion of
other checkable
deposits in the M-1B base
level. A portion of other checkables
represents funds shifted from sources not previously included in M-l B. One reason for
above-target
growth of M-1B in 1980 was
that other checkable deposits increased by
a significantly
larger amount than had been
anticipated
when 1980 targets were set. Because of the impending
introduction
of
NOW accounts, banks began to market ATS
accounts aggressively in the latter part of the
year, causing a greater diversion of funds
into these other checkable
M-l B accounts
than had been expected.
If approximately
one-third of the unforeseen growth of these
accounts
represented
portfol io shifts from
non-M-1B assets, then the 1980:IVQ
mea-

sured level of M-l B was distorted
in the
same way that currently
observed
M-l B
is distorted.
Removing this distortion
from
the 1980:IVQ
level of M-1B suggests that
the base on wh ich 1981 growth targets
are constructed
might as consistently
be set
at $410.6 billion rather than $412.5 billion.
This second form of base drift, like the
more familiar form, is not relevant to shortrun evaluation
of money growth relative to
annual targets. However, an understanding
of the sources of base drift is useful for interpreting
growth-rate
targets in a longerrange context.

Federal Reserve Bank of Cleveland
Research Department

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~£Q,Qomic
Commentary

Interpreting the Ms after the NOWs
by Theresa Gwazdauskas

Conclusion
Both policymakers
and market
participants are dependent
on the accuracy
of
money-stock
data to reflect current
economic conditions. Although the introduction
of nationwide
NOW accounts
has greatly
complicated
the interpretation
ofthe moneysupply statistics and growth ranges, the distortion is likely to diminish as the introductory
phase passes. Allowance
for these
changes
is necessary
and appropriate
for
interpreting
money-supply
statistics
and
growth ranges.

Department,

P.O. Box 6387, Cleveland,

OH 44101.

May 4,1981

Reserve Bank of Cleveland

The nationwide
introduction
of negotiable order of withdrawal
(NOW) accounts
on December 31, 1980, has produced large
shifts of funds from other assets into these
interest-bearing
transaction
accounts.
The
deposit shifts distort standard money-supply
figures compiled
by the Federal
Reserve
System,
adding to the difficulty
of interpreting
money
growth.
The bulk of the
$37.5-billion
increase
in other checkable
deposits in the first four months of the year
appears to have been transferred
from regular checking accounts,
thus tending to depress growth of the narrow definition
of
money,
M-1A.1 NOW accounts
also have

eral Reserve in setting and achieving moneygrowth targets. These distortions
also pose
problems for monetary-pol icy observers and
market participants
whose decisions are influenced
by expectations
about short-run
System operations in the money market.
This Economic Commentary
examines
possible methods to help gauge and evaluate
the NOW-account
phenomenon
and its impact on the money-supply
statistics.
It is
important
to note, however, that the introduction
of NOW accounts,
and the large
shifts of funds
a sharp impact

that have resulted, has had
on the statistics. Although

adjustments
are necessary, they are bound
be less than fully satisfactory.

to

boosted
M-l B expansion,
because the remaining portion
of the increase in other
checkable
deposits
originated
in funds
previously held in savings accounts and other
instruments
not included in this aggregate.
As a result, growth of these two narrow
monetary
aggregates
has deviated
significantly from the normal patterns. Moreover,
the money-supply
measures are not directly
comparable
with figures reported for periods
prior to the introduction
of NOW accounts.
Distortions in the measurement
of the monetary aggregates pose problems for the Fed-

Because the narrower M-l aggregates are
distorted more than either M-2 or M-3, some
analysts have turned to the broader aggregates for policy insight. However, data for
M-2 are only available on a monthly
basis,
precluding
weekly
Fed-watching.
Furthermore, many of the components
of M-2 are
less controllable
by the Federal Reserve System and have tended to receive less emphasis
than the narrower
M-l transactions
aggre-

1. Other checkable deposits include ATS (automatic transfer service) accounts and NOW balances
at all depository institutions, credit union share
draft balances, and demand deposits at mutual
savingsbanks.

Theresa Gwazdauskas is an economic analyst at
the Federal ReserveBank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal ReserveSystem.

Interpreting

the Money-Supply

Figures