The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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
@FedFRASER