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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 Cleveland,OH Permit No. 385 P.O. Box 6387 Cleveland,OH 44101 Address correction requested as shown from mailing list o Correct o Remove Please send mailing label to the Research Federal Reserve Bank of Cleveland, ~£Q,QomicCommentary 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 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 430 420 5. This may be done by using the formula RTM-18 + [~Pi· t 410 = TM-18 t (60Ci~ below: -;- 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 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 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 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 430 420 5. This may be done by using the formula RTM-18 + [~Pi· t 410 = TM-18 t (60Ci~ below: -;- 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 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 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 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 430 420 5. This may be done by using the formula RTM-18 + [~Pi· t 410 = TM-18 t (60Ci~ below: -;- 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 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 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 correction requested as shown from mailing list o Correct o Remove Please send mailing label to the Research Federal Reserve Bank of Cleveland, ~£Q,QomicCommentary 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 BULK RATE U.S. Postage Paid Cleveland,OH Permit No. 385 P.O. Box 6387 Cleveland,OH 44101 Address correction requested as shown from mailing list o Correct o Remove Please send mailing label to the Research Federal Reserve Bank of Cleveland, ~£Q,QomicCommentary 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
@FedFRASER