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Monetary Aggregates-Redefined Monetary aggregates play an important role in the Federal Reserve's control of monetary policy, because of their strong empirical association with the goals of monetary policy: full employment, stable prices, and a stable exchange value of the dollar. Over the past decide, the Federal Open Market Committee (FOM C) has formally incorporated money-growth rates into its policy directives. And in recent years, Congress has required that such objectives be established, first in Joint Resolution 133 of 1 975, and then in the Full Employment and Balanced Growth Act of 1 978 (the "Humphrey-Hawkins Act"). Consequently, since 1975, the FOM C has provided Congress with longer-run target ranges, covering one-year periods, for several major monetary aggregates. (Currently, atthe FOM C's February meeting, the committee establishes ranges extending from the fourth quarter of the preceding year to the fourth quarter of the current year.) But which aggregates are most important for the Fed's purposes? In our rapidly changing financial environment, the measures that are relevant today are not always relevanttomorrow. This situation creates pressure on the Federal Reserve to refine and redefine its measures, in ·Iine with certain analytical printipleshence the need for the redefined measures which the Fed unveiled earlier this month. Shiftingguidelines Previously, in constructing monetary aggregates, the Federal Reserve followed the guiding principle that considerable differences existed between the deposits issued by commercial banks and those issued by thrift institutions (savings-and-Ioan associations, mutual savings banks and credit unions). M-l, as a measure of transactions balances, thus included only currency and commercial-bank demand deposits. Even the broader M-2 measure excluded thriftinstitution deposits; specifically, it included currency plus all commercial-bank deposits except large negotiable time certificates at weekly reporting banks. Thrift-institution deposits were included only in M-3, the broadest targeted aggregate. Today, because of the numerous regulatory and institutional changes of the past decade, the Fed has adopted a different guiding principle which recognizes the increasing similarity of bank and thrift-institution deposits. Thus the Fed constructeg new definitions-called M-1 B, M-2 and M-3 -by aggregating particular types of bank deposits with similar thrift-institution deposits (See chart for definitions and data). In addition to these aggregates, the Fed constructed an aggregate (called M-l A), which is the same as the previous M-l except for the exclusion of certain foreign-held deposits, and another aggregate (called L) as a very broad measure of liquidity. Regulatory changes In the regulatory area, the most important change was the development of checkingtype deposits (some interest-bearing) across institutional lines. In recent years, various regulatory authorities have authorized N OW accounts (Negotiable Orders of Withdrawal) at banks and thrift institutions, share drafts at credit unions, ATS accounts (Automatic Transfer Savings) at commercial banks, and demand deposits at certain thrifts in the Eastern United States. In other words, many thrift institutions now issue transactions deposits resembling the demand deposits previously issued only by banks. Other regulatory changes provided for preauthorized savings transfers at banks and thrifts, telephone transfers of commercialbank savings balances, point of sale (POS) automated-teller terminals permitting remote savings-deposit withdrawals at savings-andloan associations, and government- and business-savings deposits at commercial 10) "5' .LW(Ql ':5\ L\ 1\ 1.(li ((,,> © h 11 c-';::J ';5.'\ <''\\ L(LI, /("'VOn ((":J ((\\ "-..\2) Opmions expressed in this do nm necE'5sarily reflect the views of ttif2 rnanagernent of the federal Reserve Bank of San Francisco, nor of the Boare! of CovelTH: Hs of the Federal I<eserve System. - - - - - - - - - - - - _ .. banks. These new regulations all have enhanced the liquidity of a significant portion of the savings deposits held by commercial banks and thrift institutions. Consequently, these deposits have taken on many of the characteristics of bank-held transactions balances. corporation, state or local government, or broker-dealer firm) and agrees to repurchase the security at a specific price and future date. A second technique involves Eurodollar deposits, which are denominated in U.S. dollars and held by U.S. nonbank residents at U.S. banks' foreign branches. Banks then borrow these funds from their foreign branches for domestic use. (Because of dataavailability problems, only deposits held at Caribbean branches could be included.) Moreover, regu latory authorities authorized commercial banks, savings banks and S&L's to issue six-month money-market certificates (MM Cs) in June 1978, and thus blurred the distinction between the time deposits of these types of depository institutions. Such deposits, with ceiling rates tied to the sixmonth Treasury-bill auction rate, have become a major source of funds for banks and thrifts ever since their authorization. In 1 979, for example, bank M M Cs quadrupled in volume during the year, reaching $265 billion, and thus offsetting an outflow of fixed-ceiling savings deposits. With better definitions which more closely reflect the market real ities of the 1 980's, the monetary will more accurately indicate the current and future condition of the economy, and hencewill helpthe Federal Reserve to devise policies to promote the goal of non-inflationary growth. Yet, the redefined aggregates will be more useful than the previous definitions, the new measures are not without problems. Financialinnovations In particular, historical data on the new aggregates may not provide a good indication of how these aggregates will change over future business cycles. Tbis problem arises because the new measures include deposit and non-deposit instruments which did not even exist prior to the past few years. Good. examples are interest-bearing checking accounts included in M-1 A and M-1 B (as well as the broader aggregates), and the money-market certificates included in M-2 and M-3. Unfortunately, this is an unavoidable problem in conducting monetary policy in a changing financial system. Certain financial-market innovations have also necessitated new definitions of the monetary aggregates. Money-market mutual funds, for example, offer investors liquidity, high rates of return (comparable to openmarket rates), and also a check-writing privilege (in minimum denominations). These funds behave like both transactions balances and short-term savings deposits, and so have become a popular alternative to low-yielding bank and thrift-institution deposits. In another market innovation, large corporations have developed soph isticated cash-management techniques which permit funds that would otherwise languish in lowinterest-bearing savings accounts or in noninterest-bearing checking accounts to earn market rates of return. One such technique involves overnight repurchase agreementstransactions where a financial institution sells a security to a customer (such as a Under these circumstances, the Federal Reserve has responded by appropriately redefining its monetary aggregates to. reflect an important trend in the U.S. financial system-the growing similarity of bank and non-bank depository institutions. JohnP. Juddand Gary C. Zimmerman 2 9 8 7 6 5 4 3 2 1 o -1 1960 70 65 75 79 M 1A = Currency + Adjusteddemanddepositsat commercialbanks - Demanddepositsof foreigncommercialbanksandofficial institutions M1B =M1 A + Othercheckabledeposits(includesNOW accounts,ATSaccounts,sharedraftbalilncesat credit unions,demanddepositsat thrift institutions) Change 14 12 10 8 6 A Redefined M2 4 2 1960 70 65 75 79 M2 = M1B + Savingsdepositsat commercialbanks + Savingsdepositsat all otherdepositoryinstitutions + Smalldenomination(lessthan$100,000)timedepositsat commercialbanks + Smalldenominationtimedepositsat all otherdepositoryinstitutions + Money marketmutualfund shares + Overnightrepurchaseagreements(RP's)issuedby commercialbanks + OvernightEurodollardepositsat Caribbeanbranchesof u.s,commercialbanks - M2 consolidationcomponent Change(%) 16 14 "'" ,, 12 10 8 1\ \ \ \ \ \ '\ , 'I 6 Previous M3 4 2 0 1960 65 70 75 M3=M2 + Largedenomination($100,000andover)timedepositsat commercialbanks + Largedenominationtime depositsat all otherdepositoryinstitutions + TermRP'sissuedby commercialbanks + TermRP'sissuedby savingsand loans Note: Dataareyear-ta-yearpercentchanges 3 79 SS'o'10 .l Sl:Il:I !!EMEH • • 4Eln • uo8aJO• EpEi\aN• o4EPI ElUJOllIE:::> • EUOZP'v'• E>J5EIV JJ (\j) 'J!Ii!:J'O:>SPUi!J::I Ui!S (;SL'ON llW1 Bd OIVd ]!)VlS Od's'n 11VW SSV1:JlSHI::I :lJ BANKINGDATA-TWELFTHFEDERAL RESERVE DISTRICT (Dollar amounts in millions) SelectedAssetsandLiabilities largeCommercialBanks Loans(gross,adjusted)and investments* Loans(gross,adjusted)- total# Commercial and industrial Realestate Loansto individuals Securitiesloans U.s. Treasurysecurities* Other securities* Demand deposits- total# Demand deposits- adjusted Savingsdeposits- total Time deposits- total# Individuals, part. & corp. (LargenegotiableCD's) WeeklyAverages of DailyFigures MemberBankReserve Position ExcessReserves(+)/Deficiency (-) Borrowings Net free reserves(+ )/Net borrowed(-) Amount Outstanding 2/13/80 138,184 115,729 33,425 44,459 24,439 1,431 6,964 15,491 43,739 31,289 28,132 59,342 50,647 21,339 Weekended 2/13/80 Change from 2/6/80 Changefrom year ago Dollar Percent + 17,559 + 14.56 + 403 + 17,186 + 17.44 + 405 75 + 15.21 + + 4,412 + 170 + 8,779 + 24.60 24 + + 3,881 + 18.89 58 176 - 10.95 + 16 667 8.74 14 + + 1,040 + 7.20 -1 ,1 12 + 3,777 + 9.45 655 + 1,309 + 4.37 146 1,627 5.47 + 16.23 + 394 + 8,285 + 22.12 + 465 + 9,175 + 13.22 + 228 ! + 2,492 Weekended Comparable year-agoperiOd 2/6/80 181 205 13 19 32 +2,212 +3,723 + 637 69 + 422 23 23 64 41 FederalFunds- Sevenlarge Banks Net interbank transactions [Purchases(+ )/Sales(-)] Net, U ,5. Securitiesdealer transactions [Loans(+ )/Borrowings(-)] 59 + * Excludestrading account securities. # Includes items not shown separately. Editorialcommentsmaybe addressed to theeditor(WilliamBurke)or to the author, , . , Freecopiesof this andotherFederalReserve publicationS canbe obtainedbycallingor writingthe PublicInformationSection, FederalReserveBankof SanFrancisco, P.O,Box7702,SanFrancisco 94120,Phone(415)544-2184. 2iI