Full text of Monetary Trends : April 2001
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April 2001 MonetaryTrends What Accounts for the Reduced Frequency of Fed Actions? Between January 1994 and January 2001, the Fed adjusted its target for the federal funds rate just 22 times, an average of about one change every four months. In contrast, there were 55 target changes during a period of similar length from 1987 through 1993—an average of one change about every month and a half. The average number of changes per unit of time can be somewhat misleading because several long periods without a target change have been followed by periods of frequent target changes. Consequently, a different, and perhaps somewhat better, measure of the frequency of target changes is the median number of business days between target changes. The median number of business days between target changes since 1994 is 53. Between 1987 and 1993, the median number of business days between changes was just 18. Eight of the 55 target changes in this period were small, 6.25 basis point changes. If these “technical adjustments” are ignored, the median increases only to 19 days. By either measure, target changes were more than 2.8 [53/19] times more frequent before 1994 than after. What accounts for the marked decrease in frequency of Fed actions? One possibility is that changes in Federal Open Market Committee (FOMC) procedures since 1994 have slowed the FOMC’s response to changing economic conditions. At its February 1994 meeting, the FOMC began the practice of announcing adjustments to its federal funds rate target immediately upon making them. About the same time, the Fed began the practice of changing the funds rate target primarily at regularly scheduled meetings. Of the 22 target changes since 1994, all but three were made at regularly scheduled FOMC meetings. In the seven prior years, four changes in five were made between meetings. In addition, since 1994 the Fed has followed the practice of holding a teleconference meeting before making adjustments to its federal funds rate target between regularly scheduled meetings. Previously, intermeeting changes in the funds rate target were made at the discretion of the Chairman with no formal Committee consultation. It is commonly believed that the Fed adjusts its funds rate target in response to new information about inflation or economic activity. While the procedural changes noted above might have slowed the Fed’s response to such shocks, it seems unlikely that they account for the marked reduction in the frequency of target changes. If the Fed responds to information about changing economic conditions in setting its funds rate target, one might expect to see more frequent target adjustments during periods when there are relatively large swings in output growth or inflation, and less frequent adjustments when economic conditions are relatively calm. Hence, the relatively benign economic conditions since 1994 have likely played an important role in the reduced frequency of Fed actions. The decade of the 1990s was unusually calm.1 Inflation has been relatively low and steady since 1994, while output growth has been relatively strong and steady. From the end of 1993 to the fourth quarter of 2000, the annualized quarterly growth rate of real GDP was below 2.0 percent in only three quarters, including the 1.1 percent growth in the fourth quarter of 2000. Therefore, until recently, there has been relatively little need to adjust the funds rate target because of a weakening economy. Indeed, the three reductions of the funds rate target in 1998 were prompted by financial market concerns following Russia’s announcement that it was defaulting on its sovereign debt. As long as inflation remains relatively low and steady, and the economy remains relatively stable, the Fed would seem to have little need to make frequent adjustments to the funds rate target. — Daniel L. Thornton 1 See National Economic Trends (March 2000). Views expressed do not necessarily reflect official positions of the Federal Reserve System. TableofContents Page 3 Monetary and Financial Indicators at a Glance 4-5 Monetary Aggregates and Their Components 6 Monetary Aggregates: Monthly Growth 7 Reserves Markets and Short-Term Credit Flows 8 Measures of Expected Inflation 9 Interest Rates 10 Policy-Based Inflation Indicators 11 Implied Forward Rates, Futures Contracts, and Inflation-Protected Securities 12-13 Velocity, Gross Domestic Product, and M2 14 Bank Credit 15 Stock Market Index, and Foreign Inflation and Interest Rates 16-18 Reference Tables 18-20 Definitions, Notes, and Sources Conventions used in this publication: 1. Unless otherwise indicated, data are monthly. 2. Shaded areas indicate recessions, as dated by the National Bureau of Economic Research. 3. The percent change at an annual rate is the simple, not compounded, monthly percent change multiplied by 12. For example, using consecutive months, the percent change at an annual rate in x between month t-1 and the current month t is: [(x t / x t-1) - 1] x 1200. Note that this differs from National Economic Trends. In that publication monthly percent changes are compounded and expressed as annual growth rates. 4. The percent change from year ago refers to the percent change from the same period in the previous year. For example, the percent change from year ago in x between month t-12 and the current month t is: [(x t / x t-12) - 1] x 100. We welcome your comments addressed to: Editor, Monetary Trends Research Division Federal Reserve Bank of St. Louis P.O. Box 442 St. Louis, MO 63166 or to: webmaster@stls.frb.org Monetary Trends is published monthly by the Research Division of the Federal Reserve Bank of St. Louis. Single-copy subscriptions are available free of charge by writing Public Affairs Office, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis, MO 63166-0442 or by calling (314) 444-8808 or (314) 444-8809. Subscription forms can also be filled out electronically at http://www.stls.frb.org/research/order/pubform.html. For more information on data, please call (314) 444-8590. Information in this publication is also included in the Federal Reserve Economic Data (FRED) electronic bulletin board at (314) 621-1824 or internet World Wide Web server at http://www.stls.frb.org/fred. The entire publication is also available electronically at http://www.stls.frb.org/publications/mt. MonetaryTrends 03/19/01 M2 and MZM Reserve Market Rates Billions of $ 5150 Percent 6.75 Effective Federal Funds Rate Expected Federal Funds Rate 6.50 4900 6.25 M2 4650 6.00 5.75 4400 5.50 4150 5.25 MZM 5.00 3900 Discount Rate 4.75 3650 4.50 3400 4.25 1998 1999 2000 2001 Adjusted Monetary Base 1998 1999 2000 2001 Treasury Yield Curve Percent change at an annual rate 50 Percent 7.75 Week ending: 03/17/00 7.25 02/16/01 03/16/01 40 30 6.75 20 6.25 10 5.75 0 5.25 -10 4.75 -20 -30 4.25 1998 1999 2000 2001 3m1y 2y 3y 5y 7y 10y 20y 30y Total Bank Credit Interest Rates Percent change at an annual rate 50 Jan 01 Feb 01 Federal Funds Rate 6.40 5.98 5.49 Discount Rate 6.00 5.52 5.00 Prime Rate 9.50 9.05 8.50 Conventional Mortgage Rate 7.38 7.03 Dec 00 40 . 30 Treasury Yields Treasury Yields: 20 10 0 -10 1998 1999 2000 . . 7.05 . . . 3-month constant maturity 5.94 5.29 5.01 6-month constant maturity 5.92 5.15 4.89 1-year constant maturity 5.60 4.81 4.68 3-year constant maturity 5.26 4.77 4.71 5-year constant maturity 5.17 4.86 4.89 10-year constant maturity 5.24 5.16 5.10 30-year constant maturity 5.49 5.54 5.45 2001 Federal Reserve Bank of St. Louis MonetaryTrends 03/19/01 MZM and M1 Percent change from year ago 20 15 MZM 10 5 0 M1 -5 -10 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 89 90 91 92 93 94 95 96 97 98 99 00 M2 Percent change from year ago 15 10 5 0 -5 84 85 86 M3 Percent change from year ago 15 10 5 0 -5 84 85 86 Monetary Services Index - M2 Percent change from year ago 15 10 5 0 -5 83 84 85 86 87 88 Federal Reserve Bank of St. Louis MonetaryTrends 03/19/01 Adjusted Monetary Base Percent change from year ago 20 15 10 5 0 -5 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 Domestic Nonfinancial Debt Currency Held by the Nonbank Public Percent change from year ago Percent change from year ago 15 15 10 Total 10 5 0 5 Federal -5 -10 0 1994 1995 1996 1997 1998 1999 2000 2001 1998 1999 2000 Time Deposits Checkable and Savings Deposits Percent change from year ago Percent change from year ago 30 20 25 15 Large Denomination 20 2001 10 15 Savings 5 10 0 5 -5 0 Small Denomination -5 Checkable -10 -10 -15 1998 1999 2000 2001 Money Market Mutual Fund Shares 1998 1999 2000 2001 Repurchase Agreements and Eurodollars Percent change from year ago Billions of dollars 40 Billions of dollars 400 350 Repos (left) 35 Institutional funds 350 300 300 250 250 200 30 25 20 15 Retail funds 200 10 5 150 Eurodollars (right) 150 1998 1999 2000 2001 100 1998 Federal Reserve Bank of St. Louis 1999 2000 2001 MonetaryTrends 03/19/01 M1 Percent change at an annual rate 40 30 20 10 0 -10 -20 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 88 89 90 91 92 93 94 95 96 97 98 99 00 01 88 89 90 91 92 93 94 95 96 97 98 99 00 01 88 89 90 91 92 93 94 95 96 97 98 99 00 01 MZM Percent change at an annual rate 40 30 20 10 0 -10 -20 84 85 86 87 M2 Percent change at an annual rate 40 30 20 10 0 -10 84 85 86 87 M3 Percent change at an annual rate 40 30 20 10 0 -10 84 85 86 87 Federal Reserve Bank of St. Louis MonetaryTrends 03/19/01 Adjusted and Required Reserves Billions of $ 100 80 Adjusted 60 Required 40 20 0 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 Total Borrowings, nsa Excess Reserves plus RCB Contracts Billions of $ Billions of $ 0.8 12 0.6 10 0.4 8 0.2 6 0.0 4 1994 1995 1996 1997 1998 1999 2000 2001 1994 1995 1996 1997 1998 1999 2000 Nonfinancial Commercial Paper Percent change from year ago 60 40 20 0 -20 -40 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 Consumer Credit Percent change from year ago 20 15 10 5 0 -5 -10 84 85 86 Federal Reserve Bank of St. Louis 2001 MonetaryTrends 03/19/01 Inflation and Inflation Expectations Percent 10 8 6 Federal Reserve Bank of Philadelphia Humphrey-Hawkins CPI inflation range 4 2 University of Michigan 0 84 CPI inflation 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 The shaded region shows the Humphrey-Hawkins CPI inflation range. Beginning in January 2000, the Humphrey-Hawkins inflation range was reported using the PCE price index and therefore is not shown on this graph. See page 19 for information. Treasury Security Yield Spreads Yield to maturity 6 30 year - 3 month 4 2 0 -2 3 year - 3 month 30 year - 3 year 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 98 99 00 01 Real Interest Rates Percent, Real rate = Nominal rate less CPI inflation 8 6 1-year Treasury Yield 4 2 Federal Funds Rate 0 -2 84 85 86 87 88 89 90 91 92 93 94 95 96 Federal Reserve Bank of St. Louis 97 02 MonetaryTrends 03/19/01 Short Term Interest Rates Percent 14 12 90-day Commercial Paper 10 8 Prime Rate 6 3-month Treasury Yield 4 2 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 98 99 00 01 Long Term Interest Rates Percent 16 14 Conventional mortgage 12 10 8 Corporate Aaa 6 4 30-year Treasury Yield 84 85 86 87 88 89 90 91 92 93 Long Term Interest Rates 94 95 96 97 Short Term Interest Rates Percent Percent 9 9 8 8 Corporate Baa 7 7 30-year Treasury Yield 6 90-day Commercial Paper 6 5 5 10-year Treasury Yield 4 3-month Treasury Yield 4 1998 1999 2000 2001 1998 1999 2000 2001 FOMC Expected Federal Funds Rate and Discount Rate Percent 12 10 Federal Funds Rate 8 6 Discount Rate 4 2 84 85 86 87 88 89 90 91 92 93 94 95 96 Federal Reserve Bank of St. Louis 97 98 99 00 01 MonetaryTrends 03/19/01 Federal Funds Rate and Inflation Targets Percent 12 4% 3% 2% 1% 0% Target Inflation Rates 9 Actual 6 3 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Calculated federal funds rate is based on Taylor’s rule. See notes on page 19. Actual and Potential Real GDP PCE Inflation and Projections Billions of chain-weighted 1996 dollars Percent change from year ago 10000 6 9500 5 9000 4 8500 3 8000 2 7500 Potential Actual 7000 1 6500 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 The shaded region shows the range of projections published in the Monetary Policy Report to Congress. See page 19 for information. Monetary Base Growth* and Inflation Targets Percent 12 Actual 9 6 3 0% 1% 2% 3% 4% Target Inflation Rates 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 *Modified for the effects of sweeps programs on reserve demand. Calculated base growth is based on McCallum’s rule. Actual base growth is percent change from year ago. See notes on page 19. Monetary Base Velocity Growth Real Output Growth Percent Percent 4 8 Actual 0 -4 4 4-year moving average 10-year moving average 0 Actual -8 -4 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Federal Reserve Bank of St. Louis MonetaryTrends 03/19/01 Implied One-Year Forward Rates Rates on 3-Month Eurodollar Futures Percent 9 8 7 Percent, daily data 5.6 Week ending: 03/17/00 02/16/01 03/16/01 5.4 6 5.0 5 4.8 4 4.6 3 2y3y 5y Mar 2001 5.2 7y 10y 20y 30y May 2001 | | Apr 2001 4.4 01/15 01/22 01/29 02/05 02/12 02/19 02/26 03/05 03/12 03/19 Rates on Selected Fed Funds Futures Contracts Implied Yields on Fed Funds Futures Percent, daily data Percent 5.6 5.6 5.5 5.4 5.3 5.2 5.1 5.0 4.9 4.8 4.7 4.6 4.5 4.4 4.3 5.4 Mar 2001 5.2 Apr 2001 5.0 4.8 May 2001 4.6 01/15 01/22 01/29 02/05 02/12 02/19 02/26 03/05 03/12 03/19 01/12/2001 02/16/2001 03/16/2001 Mar Apr May Jun Jul Aug Inflation-Protected Treasury Yields Inflation-Protected Treasury Yield Spreads Percent, weekly data Percent, weekly data 4.5 4 10-year 4.0 3 3.5 3.0 30-year 30-year 5-year 10-year 2 5-year 1 2.5 2.0 0 1997 1998 1999 2000 2001 1997 1998 1999 2000 Inflation-Indexed 30-Year Bonds Inflation-Indexed 10-Year Bonds Percent, weekly data Percent, weekly data 6 2001 6 5 5 Canada 4 US 4 US 3 3 UK 2 UK 2 1 1 1997 1998 1999 2000 2001 1997 Federal Reserve Bank of St. Louis 1998 1999 2000 2001 MonetaryTrends 03/19/01 MZM Velocity and Opportunity Cost Velocity = Nominal GDP / MZM Opportunity Cost = 3 month T-bill rate less MZM own rate 10.0 3.5 3.0 7.5 Velocity 2.5 5.0 2.0 2.5 Opportunity Cost 1.5 0.0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 M2 Velocity and Opportunity Cost Velocity = Nominal GDP / M2 Opportunity Cost = Treasury rate less M2 own rate 2.25 10.0 Velocity 2.00 7.5 1.75 5.0 Opportunity Cost (5-yr T-bond) 1.50 2.5 Opportunity Cost (3-mo T-bill) 1.25 0.0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 M2, MZM and Nominal GDP Billions of $ 12000 10000 Nominal GDP 8000 6000 M2 4000 MZM 2000 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 97 98 99 00 Interest Rates Percent 20 15 10 5-yr bond M2 own 5 3-mo bill MZM own 0 83 84 85 86 87 88 89 90 91 92 93 94 95 Federal Reserve Bank of St. Louis 96 MonetaryTrends 03/19/01 Gross Domestic Product Percent change from year ago 20 15 10 5 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 89 90 91 92 93 94 95 96 97 98 99 00 Real Gross Domestic Product Percent change from year ago 15 10 5 0 -5 83 84 85 86 87 88 Gross Domestic Product Price Index Percent change from year ago 20 15 10 5 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 M2 Percent change from year ago 20 15 10 5 0 83 84 85 Dashed lines indicate 10-year moving averages Federal Reserve Bank of St. Louis MonetaryTrends 03/19/01 Bank Credit Percent change from year ago 20 15 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 1999 2000 2001 1998 1999 2000 2001 1998 1999 2000 2001 Investment Securities in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1992 1993 1994 1995 1996 1997 1998 Total Loans and Leases in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1992 1993 1994 1995 1996 1997 Commercial and Industrial Loans at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1992 1993 1994 1995 1996 1997 Federal Reserve Bank of St. Louis MonetaryTrends 03/19/01 Standard and Poor’s 500 1600 48 1400 42 1200 36 1000 30 Price/earnings ratio (right) 800 24 600 18 400 12 Composite Index (left) 200 6 0 0 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 Inflation and Long-Term Interest Rates Trend in Consumer Price Inflation Rates Recent Long-Term Government Bond Rates Percent change from year ago 2000Q1 Jan01 Feb01 3.27 3.31 3.47 3.44 5.72 5.24 5.16 5.10 Canada 2.65 2.45 2.73 3.08 5.78 5.58 5.71 5.69 France 1.50 1.49 1.89 1.89 5.78 5.55 5.48 . Germany 1.78 1.62 2.05 2.32 5.15 4.89 4.80 4.78 Italy 2.36 2.50 2.63 2.67 5.55 5.30 5.19 5.19 -0.65 -0.59 -0.72 -0.59 1.76 1.62 1.54 1.43 2.30 3.13 3.20 3.07 5.07 4.90 4.86 4.84 United Kingdom 2000Q3 2000Q4 Percent United States Japan 2000Q2 Nov00 Dec00 Inflation and Long-Term Interest Rates Differentials Percent 3 Inflation differential = Foreign inflation less U.S. Inflation Long-term rate differential = Foreign rate less U.S. rate Percent 3 U.K. Canada U.K. Canada 0 0 Germany Germany Japan -3 -3 Japan -6 -6 1998 1999 2000 2001 1998 Federal Reserve Bank of St. Louis 1999 2000 2001 MonetaryTrends 03/19/01 Money Stock M1 Bank MZM M2 M3 Credit Monetary Base Reserves MSI M2 1996 . 1105.818 3093.199 3738.999 4809.090 3685.416 455.572 73.952 217.848 1997 . 1069.145 3315.632 3921.118 5203.986 3953.657 478.708 69.523 227.067 1998 . 1079.795 3703.061 4207.085 5738.854 4326.043 508.942 67.808 242.237 1999 . 1101.546 4160.720 4526.378 6251.496 4585.193 557.864 72.359 258.556 2000 . 1104.053 4493.794 4802.223 6830.885 5034.763 590.823 68.271 . 1998 1 1077.122 3519.960 4084.264 5519.869 4187.369 498.320 68.478 235.943 . 2 1078.248 3633.263 4159.060 5658.527 4250.254 502.020 66.943 239.950 . 3 1074.220 3746.399 4235.499 5795.672 4351.030 511.546 67.809 243.733 . 4 1089.591 3912.624 4349.517 5981.347 4515.517 523.882 68.002 249.320 1999 1 1098.625 4029.042 4427.907 6094.274 4513.673 536.334 68.521 253.370 . 2 1102.740 4126.072 4493.084 6189.352 4531.872 545.912 67.392 257.003 . 3 1095.559 4205.053 4560.659 6279.848 4595.860 557.969 69.050 260.280 . 4 1109.259 4282.714 4623.862 6442.509 4699.369 591.242 84.473 263.570 2000 1 1114.900 4364.451 4691.482 6614.255 4840.976 593.096 72.385 267.157 . 2 1109.873 4444.218 4766.379 6762.299 4993.951 586.041 67.093 270.860 . 3 1099.791 4536.031 4835.691 6913.148 5124.839 589.062 66.577 . . 4 1091.648 4630.474 4915.341 7033.840 5179.286 595.094 67.029 . 1999 Feb 1096.148 4039.213 4433.123 6110.958 4517.154 538.190 68.890 253.460 1102.242 4055.074 4444.993 6116.479 4496.765 539.053 67.195 254.390 . Mar . Apr 1107.502 4092.708 4468.843 6152.143 4508.499 539.608 64.898 255.900 . May 1100.945 4127.672 4494.313 6190.026 4522.530 548.331 69.334 257.070 . Jun 1099.774 4157.835 4516.095 6225.888 4564.587 549.796 67.944 258.040 . Jul 1097.526 4184.062 4543.190 6256.907 4570.220 553.060 67.879 259.220 . Aug 1095.763 4208.119 4561.128 6278.320 4597.885 556.711 68.158 260.240 . Sep 1093.388 4222.979 4577.659 6304.316 4619.474 564.135 71.113 261.380 . Oct 1096.442 4248.874 4598.039 6357.737 4633.951 572.989 73.928 262.320 . Nov 1107.078 4282.995 4623.578 6443.018 4691.590 588.669 84.017 263.420 . Dec 1124.256 4316.274 4649.968 6526.771 4772.566 612.068 95.475 264.970 2000 Jan 1122.785 4343.580 4670.788 6568.493 4793.045 604.790 80.818 266.190 . Feb 1108.758 4353.617 4686.415 6601.637 4839.872 589.978 69.252 266.760 . Mar 1113.156 4396.156 4717.242 6672.634 4890.010 584.520 67.084 268.520 . Apr 1117.322 4429.962 4754.762 6724.089 4939.427 583.046 65.907 270.670 . May 1106.647 4440.989 4761.520 6756.255 5003.332 587.857 68.883 270.510 . Jun 1105.649 4461.704 4782.855 6806.552 5039.094 587.219 66.490 271.400 . . Jul 1103.947 4495.726 4803.631 6855.612 5080.885 588.034 66.457 . Aug 1099.681 4533.771 4835.129 6915.312 5122.736 588.446 66.674 . . Sep 1095.745 4578.597 4868.313 6968.519 5170.895 590.705 66.599 . . Oct 1096.126 4602.397 4890.747 6990.654 5150.072 593.067 66.589 . . Nov 1088.528 4620.567 4907.975 7015.010 5162.317 595.554 67.591 . . Dec 1090.291 4668.457 4947.300 7095.857 5225.468 596.661 66.907 . 2001 Jan 1101.065 4745.687 4998.027 7190.635 5265.059 600.784 68.092 . . Feb 1100.996 4849.823 5042.752 7260.399 5287.871 606.969 66.801 . *All values are given in billions of dollars Federal Reserve Bank of St. Louis MonetaryTrends 03/19/01 Federal Discount Prime Funds Rate Rate 1996 . 5.30 5.02 8.27 1997 . 5.46 5.00 8.44 1998 . 5.35 4.92 1999 . 4.97 2000 . 3-mo CDs Treasury Yields Corporate S&L Conventional 3 mo 3 yr 30 yr Aaa Bonds Aaa Bonds Mortgage 5.39 5.15 5.99 6.70 7.37 5.52 7.80 5.62 5.20 6.10 6.61 7.26 5.32 7.60 8.35 5.47 4.91 5.14 5.58 6.53 4.93 6.94 4.62 7.99 5.33 4.78 5.49 5.87 7.04 5.28 7.43 6.24 5.73 9.23 6.46 6.00 6.22 5.94 7.62 5.58 8.06 1998 1 5.52 5.00 8.50 5.55 5.19 5.46 5.88 6.67 4.94 7.05 . 2 5.50 5.00 8.50 5.59 5.11 5.57 5.85 6.64 5.00 7.09 . 3 5.53 5.00 8.50 5.53 4.96 5.11 5.47 6.49 4.95 6.87 . 4 4.86 4.66 7.92 5.20 4.37 4.41 5.11 6.33 4.82 6.76 1999 1 4.73 4.50 7.75 4.90 4.53 4.87 5.37 6.42 4.87 6.88 . 2 4.75 4.50 7.75 4.98 4.59 5.35 5.80 6.93 5.05 7.20 . 3 5.09 4.60 8.10 5.38 4.79 5.71 6.04 7.33 5.42 7.80 . 4 5.31 4.87 8.37 6.06 5.20 6.00 6.25 7.49 5.79 7.83 2000 1 5.68 5.19 8.69 6.03 5.70 6.56 6.30 7.71 5.82 8.26 . 2 6.27 5.74 9.25 6.57 5.89 6.52 5.98 7.77 5.72 8.32 . 3 6.52 6.00 9.50 6.63 6.20 6.16 5.80 7.61 5.45 8.03 . 4 6.47 6.00 9.50 6.59 6.20 5.63 5.69 7.40 5.32 7.64 1999 Feb 4.76 4.50 7.75 4.90 4.56 4.90 5.37 6.40 4.80 6.81 Mar 4.81 4.50 7.75 4.91 4.57 5.11 5.58 6.62 4.96 7.04 . Apr 4.74 4.50 7.75 4.88 4.41 5.03 5.55 6.64 4.89 6.92 . May 4.74 4.50 7.75 4.92 4.63 5.33 5.81 6.93 5.05 7.15 . Jun 4.76 4.50 7.75 5.13 4.72 5.70 6.04 7.23 5.22 7.55 . Jul 4.99 4.50 8.00 5.24 4.69 5.62 5.98 7.19 5.24 7.63 . Aug 5.07 4.56 8.06 5.41 4.87 5.77 6.07 7.40 5.47 7.94 . Sep 5.22 4.75 8.25 5.50 4.82 5.75 6.07 7.39 5.56 7.82 . Oct 5.20 4.75 8.25 6.13 5.02 5.94 6.26 7.55 5.78 7.85 . Nov 5.42 4.86 8.37 6.00 5.23 5.92 6.15 7.36 5.77 7.74 . Dec 5.30 5.00 8.50 6.05 5.36 6.14 6.35 7.55 5.82 7.91 2000 Jan 5.46 5.00 8.50 5.95 5.50 6.49 6.63 7.78 5.91 8.21 . Feb 5.73 5.24 8.73 6.01 5.73 6.65 6.23 7.68 5.88 8.33 . Mar 5.85 5.34 8.83 6.14 5.86 6.53 6.05 7.68 5.68 8.24 . Apr 6.02 5.50 9.00 6.28 5.82 6.36 5.85 7.64 5.60 8.15 . May 6.27 5.71 9.24 6.71 5.99 6.77 6.15 7.99 5.87 8.52 . Jun 6.53 6.00 9.50 6.73 5.86 6.43 5.93 7.67 5.69 8.29 . Jul 6.54 6.00 9.50 6.67 6.14 6.28 5.85 7.65 5.53 8.15 . Aug 6.50 6.00 9.50 6.61 6.28 6.17 5.72 7.55 5.43 8.03 . Sep 6.52 6.00 9.50 6.60 6.18 6.02 5.83 7.62 5.40 7.91 . Oct 6.51 6.00 9.50 6.67 6.29 5.85 5.80 7.55 5.46 7.80 . Nov 6.51 6.00 9.50 6.65 6.36 5.79 5.78 7.45 5.38 7.75 . Dec 6.40 6.00 9.50 6.45 5.94 5.26 5.49 7.21 5.11 7.38 2001 Jan 5.98 5.52 9.05 5.62 5.29 4.77 5.54 7.15 4.99 7.03 . Feb 5.49 5.00 8.50 5.26 5.01 4.71 5.45 7.10 5.09 7.05 . *All values are given as a percent at an annual rate Federal Reserve Bank of St. Louis MonetaryTrends M1 MZM 03/19/01 M2 M3 6.75 Percent change from previous period 1996 . -3.21 6.56 4.79 1997 . -3.32 7.19 4.87 8.21 1998 . 1.00 11.68 7.29 10.28 1999 . 2.01 12.36 7.59 8.93 2000 . 0.23 8.01 6.09 9.27 1998 1 0.92 2.77 1.87 2.50 . 2 0.10 3.22 1.83 2.51 . 3 -0.37 3.11 1.84 2.42 . 4 1.43 4.44 2.69 3.20 1999 1 0.83 2.98 1.80 1.89 . 2 0.37 2.41 1.47 1.56 . 3 -0.65 1.91 1.50 1.46 . 4 1.25 1.85 1.39 2.59 2000 1 0.51 1.91 1.46 2.67 . 2 -0.45 1.83 1.60 2.24 . 3 -0.91 2.07 1.45 2.23 . 4 -0.74 2.08 1.65 1.75 1999 Feb -0.12 1.16 0.62 0.92 0.56 0.39 0.27 0.09 . Mar . Apr 0.48 0.93 0.54 0.58 . May -0.59 0.85 0.57 0.62 . Jun -0.11 0.73 0.48 0.58 . Jul -0.20 0.63 0.60 0.50 . Aug -0.16 0.57 0.39 0.34 . Sep -0.22 0.35 0.36 0.41 . Oct 0.28 0.61 0.45 0.85 . Nov 0.97 0.80 0.56 1.34 . Dec 1.55 0.78 0.57 1.30 2000 Jan -0.13 0.63 0.45 0.64 . Feb -1.25 0.23 0.33 0.50 . Mar 0.40 0.98 0.66 1.08 . Apr 0.37 0.77 0.80 0.77 . May -0.96 0.25 0.14 0.48 . Jun -0.09 0.47 0.45 0.74 . Jul -0.15 0.76 0.43 0.72 . Aug -0.39 0.85 0.66 0.87 . Sep -0.36 0.99 0.69 0.77 . Oct 0.03 0.52 0.46 0.32 . Nov -0.69 0.39 0.35 0.35 . Dec 0.16 1.04 0.80 1.15 2001 Jan 0.99 1.65 1.03 1.34 . Feb -0.01 2.19 0.89 0.97 Federal Reserve Bank of St. Louis Definitions Notes M1: the sum of: currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions, except demand deposits due to the Treasury and depository institutions, minus cash items in process of collection and Federal Reserve float. Page 3: MZM, or “Money, Zero Maturity” includes the zero maturity, or immediately available, components of M3. MZM equals M2 minus small denomination time deposits, plus institutional money market mutual funds (that is, the money market mutual funds included in M3 but excluded from M2). Readers are cautioned that since early 1994 the level and growth of M1 have been depressed by retail sweep programs that reclassify transactions deposits (demand deposits and other checkable deposits) as savings deposits overnight, thereby reducing banks’ required reserves; see http://www.stls.frb.org/research/swdata.html. For analytical purposes, MZM largely replaces M1. The Discount Rate and Expected Federal Funds Rate shown in the chart Reserve Market Rates, are plotted as of the date of the change, while the Effective Federal Funds Rate is plotted as of the end of the month. Interest rates in the table are monthly averages from the Board of Governors H.15 Statistical Release. Treasury Yield Curve shows constant maturity yields calculated by the U.S. Treasury Department for securities with 3 months and 1, 2, 3, 5, 7,10, 20 and 30 years to maturity. Daily data and a description are available at http://www.stls.frb.org/fred/data/wkly.html. See also Federal Reserve Bulletin, table 1.35. MZM: M2 minus small denomination time deposits, plus institutional money market mutual funds. The label MZM was coined by William Poole (1991) for this aggregate, proposed earlier by Motley (1988). Due to distortions caused by regulatory changes, the largest of which the introduction of money market accounts, data for MZM begin March 1983 in this publication. M2: M1 plus: savings deposits (including money market deposit accounts) and small denomination (less than $100,000) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments of less than $50,000), net of retirement accounts. M3: M2 plus: large denomination ($100,000 or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank U.S. addresses held at foreign offices of U.S. banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $50,000 or more). Bank Credit: all loans, leases and securities held by commercial banks. Domestic Nonfinancial Debt: total credit market liabilities of the U.S. Treasury, federally sponsored agencies, state and local governments, households, and firms except depository institutions and money market mutual funds. Adjusted Monetary Base: the sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. This series is a spliced chain index; see Anderson and Rasche (1996a,b). Adjusted Reserves: the sum of vault cash and Federal Reserve Bank deposits held by depository institutions, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. This series, a spliced chain index, is numerically larger than the Board of Governors’ measure which excludes vault cash not used to satisfy statutory reserve requirements and Federal Reserve Bank deposits used to satisfy required clearing balance contracts; see Anderson and Rasche (1996a) and http://www.stls.frb.org/research/newbase.html. Monetary Services Index: an index which measures the flow of monetary services received by households and firms from their holdings of liquid assets; see Anderson, Jones and Nesmith (1997). Indexes are shown for the assets included in M2; additional data are available at http://www.stls.frb.org/research/msi/index.html. Note: M1, M2, M3, Bank Credit and Domestic Nonfinancial Debt are constructed and published by the Board of Governors of the Federal Reserve System. For details, see Federal Reserve Bulletin, tables 1.21 and 1.26. MZM, Adjusted Monetary Base, Adjusted Reserves and Monetary Services Index are constructed and published by the Research Division of the Federal Reserve Bank of St. Louis. Page 5: Total Checkable Deposits is the sum of demand and other checkable deposits. Total Savings Deposits is the sum of money market deposit accounts (MMDA), and passbook and statement savings. Time Deposits have a minimum initial maturity of 7 days. Large Time Deposits are deposits of $100,000 or more. Retail and Institutional Money Market Mutual Funds are as included in M2 and the non-M2 component of M3, respectively. Page 7: Excess Reserves plus RCB (Required Clearing Balance) Contracts equals the amount of deposits at Federal Reserve Banks held by depository institutions but not applied to satisfy statutory reserve requirements. (This measure excludes the vault cash held by depository institutions that is not applied to satisfy statutory reserve requirements.) Consumer credit includes most short- and intermediate-term credit extended to individuals. See Federal Reserve Bulletin, table 1.55. Page 8: Inflation expectations measures include the quarterly Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, the monthly University of Michigan Survey Research Center’s Surveys of Consumers, and the annual Federal Open Market Committee range as reported to the Congress in the February Humphrey-Hawkins Act testimony each year. Beginning February 2000, the FOMC began using the Personal Consumption Expenditures (PCE) price index to report its inflation range, and therefore is not shown on this graph. CPI Inflation is the percentage change from a year ago in the CPI for all urban consumers. Real Interest Rates are ex post measures, equal to nominal rates minus CPI inflation. Page 9: FOMC Expected Federal Funds Rate is the level (or midpoint of the range, if applicable) of the federal funds rate that the staff of the Federal Open Market Committee expected to be consistent with the desired degree of pressure on bank reserve positions. Page 10: Federal Funds Rate and Inflation Targets shows the observed federal funds rate, quarterly, and the level of the funds rate implied by applying Taylor’s (1993) equation ft* = 2.5 + πt-1 + (πt-1 - π*)/2 + 100 × (yt-1 - yt-1P)/2 to five alternative target inflation rates π* = 0, 1, 2, 3, 4 percent, where ft* is the implied federal funds rate, πt-1 is the previous period’s inflation rate (PCE), yt-1 is the log of the previous period’s level of real GDP, and yt-1P is the log of an estimate of the previous period’s level of potential output. Potential real output is as estimated by the Congressional Budget Office. Monetary Base Growth and Inflation Targets shows the quarterly growth of the adjusted monetary base (modified to include an estimate of the effect of sweep programs) implied by applying McCallum’s (1988, 1993) equation ∆MBt* = π* + (10-year moving average growth of real GDP) – (4-year moving average of base velocity growth) to five alternative target inflation rates π* = 0, 1, 2, 3, 4 percent, where ∆MBt* is the implied growth rate of the adjusted monetary base. The 10-year moving average growth of real GDP for a quarter “t” is calculated as the average quarterly growth during the previous 40 quarters, at an annual rate, by the formula ((yt - yt-40)/40) × 4 × 100, where yt is the log of real GDP. The four-year moving average of base velocity growth is calculated similarly. To adjust the monetary base for the effect of retail-deposit sweep programs, we add to the monetary base an amount equal to 10 percent of the total amount swept, as estimated by the Federal Reserve Board staff. These estimates are imprecise, at best. Sweep program data are available at http://www.stls.frb.org/research/swdata.html. Page 11: Implied One–Year Forward Rates are calculated by this Bank from Treasury constant maturity yields. Yields to maturity, R(m), for securities with m = 1,..., 30 years to maturity are obtained by linear interpolation between reported yields. These yields are smoothed by fitting the regression suggested by Nelson and Siegel (1987) -m/50 R(m) = a0 + (a1 + a2)(1 – e )/(m/50) – a2 × e -m/50 , and forward rates are calculated from these smoothed yields using equation (a) in Table 13.1 of Shiller (1990) f(m) = [D(m)R(m) – D(m-1)] / [D(m) – D(m-1)] –R(m) × m ) / R(m). These where duration is approximated as D(m) = (1 – e rates are linear approximations to the true instantaneous forward rates; see Shiller. For a discussion of the use of forward rates as indicators of inflation expectations, see Sharpe (1997). Rates on 3-Month Eurodollar Futures and Rates on Selected Fed Funds Futures Contracts each trace through time the yield on three specific contracts. Implied Yields on Fed Funds Futures displays a single day’s snapshot of yields for contracts expiring in the months shown on the horizontal axis. Inflation-Protected Treasury Yield Spreads equal, for 5, 10, and 30 year maturities, the difference between the Treasury constant maturity yield and the yield on the most recently issued inflation-protected security. Inflation-Indexed Bonds for Canada are the 31-year bond with a maturity date of 12/01/2026; for the U.K., the 37.5-year bond with a maturity date of 07/17/2024 and the 12.1-year bond with a maturity date of 10/21/2004; and, for the U.S., the 30-year bond with a maturity date of 04/15/2028 and the 10-year bond with a maturity date of 01/15/2007. Page 12: Velocity (for MZM and M2) equals the ratio of GDP, measured in current dollars, to the level of the monetary aggregate. MZM and M2 Own Rates are weighted averages of the rates received by households and firms on the assets included in the aggregates. Two alternative opportunity costs are shown, one relative to the 3-month Treasury constant-maturity yield, the other to the 5-year constantmaturity yield. Page 13: Real Gross Domestic Product is GDP as measured in chained 1992 dollars. The Gross Domestic Product Price Index is the implicit price deflator for GDP, which is defined by the Bureau of Economic Analysis, U.S. Department of Commerce, as the ratio of GDP measured in current dollars to GDP measured in chained 1992 dollars. Page 14: Investment Securities are all securities held by commercial banks in both investment and trading accounts. Sources Bank of Canada Canadian inflation-linked bond yields. Bank of England U.K. inflation-linked bond yields. Board of Governors of the Federal Reserve System Monetary aggregates and components, nonfinancial debt: H.6 release; bank credit and components: H.8 release; consumer credit: G.19 release; required reserves, excess reserves, clearing balance contracts and discount window borrowing: H.4.1 and H.3 releases; interest rates: H.15 and G.13 releases; nonfinancial commercial paper: Board of Governors web site; M2 and MZM own rates. Bureau of Economic Analysis Gross domestic product. Bureau of Labor Statistics Consumer price index. Federal Reserve Bank of Philadelphia Survey of Professional Forecasters inflation expectations. Federal Reserve Bank of St. Louis Adjusted monetary base and adjusted total reserves, monetary services index, one-year forward rates. Organization for Economic Cooperation and Development International interest and inflation rates. University of Michigan Survey Research Center Median expected price change. Congressional Budget Office Potential real GDP. Dow Jones and Co. (Wall Street Journal) Federal funds futures contracts, Eurodollar futures. Standard and Poors Inc. Stock price-earnings ratio, stock price composite index. U.S. Department of the Treasury U.S. inflation-protected security yields. References Anderson, Richard G. and Robert H. Rasche (1996a). “A Revised Measure of the St. Louis Adjusted Monetary Base,” Federal Reserve Bank of St. Louis Review, March/April 1996, pp. 3 - 13. and (1996b). “Measuring the Adjusted Monetary Base in an Era of Financial Change,” Federal Reserve Bank of St. Louis Review, November/December 1996, pp. 3 - 37. , Barry E. Jones and Travis D. Nesmith (1997). “Special Report: The Monetary Services Indexes Project of the Federal Reserve Bank of St. Louis,” Federal Reserve Bank of St. Louis Review, January/ February 1997, pp. 31 - 82. McCallum, Bennett T. (1988). “Robustness Properties of a Monetary Policy Rule,” Carnegie-Rochester Conference Series on Public Policy, vol. 29, pp. 173 - 204. (1993). “Specification and Analysis of a Monetary Policy Rule for Japan,” Bank of Japan Monetary and Economic Studies, November, pp. 1 - 45. Motley, Brian (1988). “Should M2 Be Redefined?” Federal Reserve Bank of San Francisco Economic Review, Winter, pp. 33 - 51. Nelson, Charles R. and Andrew F. Siegel (1987). “Parsimonious Modeling of Yield Curves,” Journal of Business, October, pp. 473 - 89. Poole, William (1991). Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November 6, 1991. Government Printing Office, Serial No. 102-82. Sharpe, William F. (1997). Macro-Investment Analysis, on-line textbook available at www.stanford.edu/~wfsharpe/mia/mia.htm. Shiller, Robert (1990). “The Term Structure of Interest Rates,” Handbook of Monetary Economics, vol. 1, B. Friedman and F. Hahn, eds., pp. 627 - 722. Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, vol. 39, pp. 195 - 214. Note: Articles from this Bank’s Review are available on the Internet at www.stls.frb.org/research/index.html.
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