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November 21, 1980
Shiftsin the Aggregates
The Federal Reservethis week raised its basic
discount rate from 11 percent to 12 percent,
and adopted a surcharge of two percentage
points on frequent use of the discount window by large borrowers. The Fed took these
actions "in view of the current level of shortterm market interest rates and the recent rapid
growth in the monetary aggregates and bank
credit."
This latest money-tightening move calls attention to the fact that some (but not all) of the
monetary aggregates have exceeded their
growth targets for the year to date. Over the
January-October period, the narrow M-l A
measure of the money supply grew at a 5.5percent average annual rate-within the target range announced by Chairman Volcker
early in the year. But the broader M-l Band
M-2 measures grew at 7.6 and 10.2-percent
annual rates, respectively-both exceeding
the tops of their targeted ranges. This divergence in growth patterns points up the difficulty of "fine tuning" the growth of individual
aggregates.
An explanation of this divergence in growth
patterns requires an analysis of the components of the various aggregates.M-l A includes
cu rrency and ban k demand deposits. M-1 Bin
addition includes "other checkable deposits"
at banks and thrift institutions (mostly automatic transfer and N O W accounts). The
much broader M-2 measure adds in savings
and small time deposits at banks and thrift
institutions, plus money-market mutual fund
shares and overnjght balances in the form of
repurchase agreements and Eurodollar deposits. (The M-2 aggregate is more than four
times larger than the narrower M-l A and
M-1 B measures.) Our analysis thus concentrates on the reasons why the M-1 B components that are not included in M-1 A, and the
M-2 components that are not included in
M-1 B, have behaved as they have this year.
M-1A versus
M-1B
M-1 B has grown much faster than M-l A be-
cause of the faster-than-anticipated growth of
other checkable deposits since last May-a
61 -percent annual rate of increase in the
May-September period alone. The increase
has been significant in "negotiable order of
withdrawal" (N OW) accounts in those states
where depository institutions can offer
N O Ws, and even more in "automatic transfer from savings" (ATS) accounts. In the San
Francisco Reserve District, ATS balances
grew at a 78-percent annual rate between
May and September, compared with a 24percent growth rate between
and
April.
On the supply side, the surge in ATS accounts
reflects the resuIts of the aggressive marketi ng
campaigns thatbanks have undertaken this
year. The legal status of such accounts had
been uncertain because of an April 1 979
court ruling which overturned the regulation
which had authorized them. That legal cloud
was removed this March, however, with the
passage of the Monetary Control Act, and banks soon thereafter began their aggressive
marketing campaigns. In part, banks pushed
ATS accounts as a means of getting a headstart on their thrift competitors, who under
the act will be able to offer N OW accounts
nationwide at the end of this year. Meanwhile, some banks may find greater profit
prospects with ATS accounts than with the
forthcoming N OW accounts; for larger
banks, marginal reserve requirements will be
lower on ATS accounts than on newly authorized N OW accounts during the prolonged
phase-in period for required reserves.
On the demand side, the pricing of ATS accounts apparently has induced consumers to
switch funds from both traditional checking
and savings accounts. Most banks pay 5%
percent (the passbook-savings rate) on their
ATS accounts, while requiring substantial
minimum balances ($1,500-$2,000) from
customers who wish to avoid service charges.
This pricing strategy encourages households
Opinions
expressed in This ne:wslette'r (io not
reflect the view-; of the
[.1a1!k (;{
nor of the Boan:! of Cov(-';rrH:}rS of the Federal
certificates yielding a market-determined rate
of interest-the 6-month money-market certificate and the 30-month time certificate.
(The 6-month certificates now account for 54
percent of all small time deposits.) Most of the
funds in this category probably came from
savings deposits, but some funds probably
also came from Treasury-bill holdings, which
wou Id have caused a greater-than-expected
growth in M-2. The growth of this component
moderated between May and August, but
then accelerated again in response to rising
interest rates, providing a mirror image to the
movement in savings deposits.
to transfer savings funds to ATS to meet minimum-balance requirements, and to shift
checking funds to cover transaction needs.
It is clear from the unexpected growth in
other checkable deposits (OCD) that to finetune the growth of each aggregate is, at best, a
difficult undertaking. The unexpected increase in O CD balances due to the increased
supply of, and demand for, such deposits
caused M-1 A to grow at a slower rate than
otherwise expected, and caused M-1 Band
M-2 to grow at faster rates than expected.
M-1B versusM-2
Money-market
mutualfunds. he exponenT
tial growth in money-market funds (MMFs)
also reflected the sharp rise in market interest
rates of the past two years. The growth in this
category, like the growth in small time deposits, probably represents a shift of funds out of
savings deposits. The growth was much
greater than expected, however, reflecting a
sudden increase in consumer acceptance of
this type offinancial instrument-and reflecting also the ability of M M Fs to entice funds
out of direct money-market investment.
Small corporations,' for example, frequently
find that M M Fs provide greater liquidity and
yield higher returns than direct investments,
net of expenses. M-2 thus has grown more
rapidly than the market expected because of
shifts of funds out of money-market instruments, which are not included in M-2.
Based on the target growth ranges, the M-2
aggregate was expected to grow at a rate 2.0
to 2.5 percent faster than M-l B -but the actual spread was about 3.0 percentage points.
Th is slightly faster-than-anticipated growth in
M-2, relative to M-1 B, could be due to unexpected changes in anyof the fou r major components that make up the difference between
the two aggregates (see chart). Analysis of
the growth patterns of these componentssavings deposits, small time deposits, moneymarket funds, and overnight Eurodollars and
repurchase agreements-suggests that, despite shifts among components, much of the
growth came from funds shifted out of direct
investment in the money markets.
Savings
deposits.
"Passbook" savings deposits declined steadily from November 1 978
through May 1980, as consumers responded
to rising market interest rates by switching
funds to higher-yielding assets.With the latespring decline in rates, the downward trend
was reversed, as consumers apparently
placed funds from maturing assets in passbook savings to take advantage of the liquidity offered by such accounts. Passbook flows
have weakened more recently, however, in
line with the latest upsurge in market rates.
Overnight
Eurodollars RPs. balance,
and
On
outstanding Eurodollars and repurchase
agreements have changed relatively little
since a year ago. Month-to-month changes
have been substantial, however, reflecting
changes in banks' needs for funds. For example, Eurodollar balances declined sharply
in November 1 979 af1d again in April
1 980 for several reasons, including Federal Reserve money-tightening measuresspecifically, the imposition of increased
marginal reserve requirements on managed
liabilities. Yet given the uneven growth of
Eurodollars and RPs,they don't seem to provide an explanation for the overall growth of
M-2 this year.
Smalltimedeposits. growth in small
The
(under $100,000) time deposits more than
offsetthe decline in savings deposits in the
period November 1 978-May 1980. This shift
primarily reflected the introduction of two
2
Spreads
betweenaggregates
A similar, though smaller, divergence has developed this year between the actual and
implicit spreads between M-1 Band M-2
growth. The somewhat faster growth of M-2,
relative to M-1 B, represents a shift of funds
from direct investment in Treasury bills and
other money-market instruments not in M-2,
to money-market funds and
certificates. These two components of M-2
grew unevenly, but overall at a very rapid
pace, over the year to date.
Because of the differential impact of the factors affecti ng the growth of the various monetary aggregates, the spreads between the
actual growth rates have been greater than
expected this year. Over the first three quarters, the actual spread between M-1 A growth
and M-1 B growth has amounted to 2.0 percent annually, compared to the O.S-percent
spread implicit in this year's targets. Meanwhile, the spread between actual M-1 B
growth and actual M-2 growth has amounted
to 3.0 percent annually, compared to the
2.0-2. S-percent spread implicit in the targets.
When the Federal Reserve set growth targets
for M-1 A, M-1 B, and M-2 last February, and
when it reviewed them lastJuly, it stressed the
need for wide growth ranges because of the
many uncertainties affecting the behavior of
various components of the aggregates. The
divergent growth patterns of those components this year suggestthat there was reason for
such concern. The 1 980 experience with the
aggregatesthus will provide grist for the Fed's
mills when it develops revised monetary targets for 1981.
In the case of M-1 B, much of the divergence
can be explained in terms of the unanticipated growth in other checkable deposits, especially ATSaccounts. Perhaps two-thirds of
ATS balances come from M-1 A demand deposits, so that unexpected ATS growth slows
M-1 A growth and widens the spread between
M-1 A and M-1 B. The spread is further widened by the injection into ATS balances of
funds shifted from assetsother than checking
accounts.
BarbaraBennett
Outstanding Deposits
$ Billions
$ Billions
750
80
650
60
Eurodollar
deposits
+ RPs
I
550
40
450
20t- ___ __
.....--..
1978
1979
1'978
1 980
3
j
1979
1980
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BANKINGDATA-TWELFTH
FEDERAL
RESERVE
DISTRICT
(Dollaramouflts millions)
in
Loans
(gross,
adjusted) investments*
and
Loans
(gross,
adjusted)
-total#
Commercial industrial
and
Real
estate
Loans individuals
to
Securities
loans
U.s.Treasury
securities*
Othersecurities'"
Demand
deposits total
#
Demand
deposits adjusted
Savings
deposits total
Timedeposits tota!#
Individuals, & corp.
part.
(Large
negotiable
CD's)
WeeklyAverages
of Daily Figures
MemberBankReserve
Position
Excess
Reserves )/Deficiency
(+
(-)
Borrowings
Netfreereserves )/Netborrowed )
(+
(-
• l?Pl?i\t3N • oljE'PI
l?UOZPV •
E'>jSl?IV
CD)
·J!re::>
IO:lSpUl!J:I
Ul!S
lSL · ON 11Wmd
Selected
Assets Liabilities
and
large Commercial
Banl(S
•
Amount
Outstanding
11/12/80
144,133
122,016
35,736
49,217
23,733
1,202
6,687
15,430
47,193
35,273
29,484
67,103
58,180
26,139
Change
from
11/5/80
1,052
1,034
58
100
8
20
2
16
-1,068
857
417
1,226
1,211
520
Change
from
yearago
Dollar
Percent
-
-
Weekended
Weekended
11/12/80
11/5/80
n.a.
n.a.
-
6.4
8.6
12.0
16.1
0.6
23.3
10.4
1.5
2.5
9.3
1.7
16.4
18.1
21.8
Comparable
year-ago
period
n.a.
n.a.
8,697
9,710
3,818
6,817
154
366
777
236
1,141
2,987
481
9,431
8,897
4,674
-
39
277
238
* Excludes
trading
account
securities.
# Include!?
items shown
not
separately.
,
Editorial
comments be addressed theeditor(WilliamBurke) to the author••.. Free
may
to
or
copies this
of
andotherFederal
Reserve
publications beobtained calling writingthePublic
can
by
or
Infonnation
Section,
Federal
Reserve
Bank SanFrancisco, Box7702,SanFrancisco
of
P.O.
94120.Phone
(415)544-2184.
@FedFRASER