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MonetaryTrends December 2010 Unemployment and the Role of Monetary Policy T he most recent U.S. business cycle contraction reached its trough in June 2009 according to the National Bureau of Economic Research. Yet, labor markets—at least when measured by the unemployment rate—have yet to show significant improvement. The Federal Reserve has a dual mandate that includes both maximum sustainable employment and price stability: Should Federal Reserve policymakers feel that they must act to reduce unemployment? Or is current unemployment beyond the reach of monetary policy? Macroeconomics emphasizes that the primary means to reduce the unemployment rate is to increase the growth rate of aggregate demand (setting aside job retraining and similar labor market programs). Since the 1960s, analysts often have referred to the relationship between the growth rate of gross domestic product (GDP) and the unemployment rate during the recovery from a business cycle trough as “Okun’s law.” Derived from historical relationships, this rule of thumb suggests that the unemployment rate will fall by 1 percentage point during each year that the growth rate of GDP exceeds the growth rate of potential output by 2 percentage points. Other analysts, however, have argued that Okun’s law is misleading: Policymakers cannot exploit this relationship because it depends crucially on inflation expectations not increasing following expansionary policy actions. If inflation expectations increase rapidly following a shift toward expansionary policy, the law’s relationship vanishes. Further, the law depends on estimates of the growth rate of potential output, which often are highly uncertain. Although the Fed’s dual mandate includes “maximum sustainable employment,” these words presumably refer to that portion of unemployment that monetary policy actions have some power to affect: cyclical unemployment—that is, unemployment caused by the diminished demand for workers resulting from a downturn in the business cycle. A second theme, also dating from the 1960s, has been revived recently to question the efficacy of monetary policy to combat current unemployment: structural unemployment (mismatches in the labor market between the skills needed by firms and those possessed by prospective employees). Structural unemployment is one of the two types of unemployment that monetary policy cannot be expected to influence. The other type is frictional unemployment, which refers to workers (voluntarily and involuntarily) changing jobs and the time required to locate better matches between workers and jobs. Batini et al. (2010) suggest that 1.75 percentage points of the current unemployment rate may be attributable to unusually large skill mismatches. Kocherlakota (2010) offers an even higher estimate of 2.5 percentage points. In the recent recession, an additional factor has been the extension of unemployment benefits from 6 months to 99 weeks. Elsby, Hobijn, and Şahin (2010) argue the extension has increased the unemployment rate by 1.8 percentage points above where it otherwise would be. The chart compares the unemployment rate and average duration of unemployment for all months since 1948, highlighting the months since the March 1991 business cycle trough. Note that observations for the past three recoveries (following business cycle troughs in March 1991, November 2001, and January 2009) lie at the upper edge of the scatter diagram; further, the current recovery is conspicuous for its high unemployment rate and duration. The data suggest that the extent of structural unemployment during economic downturns has increased since 1991. Identifying the causes of this phenomenon is an active research area. One hypothesis is that an increasingly rapid pace of technological change erodes worker skills more rapidly than in the past, and that the erosion becomes evident primarily during downturns when separated workers seek jobs with new employers. The increasing duration of unemployment is worrisome because studies suggest that long periods of unemployment reduce the likelihood that a worker will ever find new stable employment. Do the chart’s data also suggest that monetary policy since 1991 might have become less effective in reducing unemployment during cyclical recoveries? Perhaps, but the picture is not clear. Labor productivity increased rapidly during the two previous recoveries but not in the current recovery, reinforcing arguments that inadequate aggregate demand may be the culprit behind this recovery’s persistently high and long-duration unemployment. —Brett Fawley and Luciana Juvenal Elsby, Michael; Hobijn, Bart and Şahin, Ayşegül. “The Labor Market in the Great Recession,” in David H. Romer and Justin Wolfers, eds., Brookings Papers on Economic Activity: Spring 2010. Washington, DC: Brookings Institution, 2010, pp. 1-48. Kocherlakota, Narayana. “Back Inside the FOMC.” Presented in Missoula, MT, September 8, 2010 Batini, Nicoletta; Celasun, Oya; Dowling, Thomas; Estevão, Marcello; Keim, Geoffrey; Sommer, Martin and Tsounta, Evridiki. “United States: Selected Issues Paper.” IMF Country Report No. 10/248, International Monetary Fund, July 2010. Average Duration of Unemployment (weeks) 35 1992:01−2010:09 1948:01−1991:12 2010:09 30 25 2009:06 2007:12 20 1984:02 15 1982:11 10 1981:07 1990:06 2 3 4 5 6 7 8 Unemployment Rate (%) 9 10 11 NOTE: Both business cycle recoveries and contractions since 1948 are shown. The dates identify the first and last official months of the 2007-09 and 1981-82 recessions, as well as the 15th month after the official end of each recession. The 1990:06 date shows the month immediately preceding the 1990-91 recession. SOURCE: Bureau of Labor Statistics; both series are seasonally adjusted. Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org Contents Page 3 4 6 7 8 9 10 11 12 14 15 16 18 Monetary and Financial Indicators at a Glance Monetary Aggregates and Their Components Reserves Markets and Short-Term Credit Flows Senior Loan Officer Opinion Survey on Bank Lending Practices Measures of Expected Inflation Interest Rates Policy-Based Inflation Indicators Implied Forward Rates, Futures Contracts, and Inflation-Indexed Securities Velocity, Gross Domestic Product, and M2 Bank Credit Stock Market Index and Foreign Inflation and Interest Rates Reference Tables Definitions, Notes, and Sources Conventions used in this publication: 1. Unless otherwise indicated, data are monthly. 2. Shaded areas indicate recessions, as determined by the National Bureau of Economic Research. 3. 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: [(xτ /x τ – 1 )–1] × 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: [(xτ /x τ – 12 )–1] × 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 63166-0442 On March 23, 2006, the Board of Governors of the Federal Reserve System ceased the publication of the M3 monetary aggregate. It also ceased publishing the following components: large-denomination time deposits, RPs, and eurodollars. or to: stlsFRED@stls.frb.org Monetary Trends is published monthly by the Research Division of the Federal Reserve Bank of St. Louis. Visit the Research Division’s website at research.stlouisfed.org/publications/mt to download the current version of this publication or register for e-mail notification updates. For more information on data in the publication, please visit research.stlouisfed.org/fred2 or call (314) 444-8590. updated through 11/16/10 Monetary Trends M2 and MZM Treasury Yield Curve Billions of dollars Percent 9900 5 MZM Week Ending Friday: 11/06/09 10/08/10 11/05/10 4 8900 3 M2 7900 2 6900 1 2007 2008 2009 5y 2010 7y 10y Adjusted Monetary Base Real Treasury Yield Curve Percent change at an annual rate Percent 400 3 300 20y Week Ending Friday: 11/13/09 10/15/10 11/12/10 2 200 100 1 0 0 -100 -200 -1 2007 2008 2009 Reserve Market Rates 7y 10y 20y Inflation-Indexed Treasury Yield Spreads Percent Percent 8 7 5y 2010 2.5 Effective Federal Funds Rate Intended Federal Funds Rate Primary Credit Rate 6 Week Ending Friday: 11/13/09 10/15/10 11/12/10 2.0 5 4 3 1.5 2 1 0 1.0 2007 2008 2009 2010 5y 7y 10y 20y Note: Effective December 16, 2008, FOMC reports the intended Federal Funds Rate as a range. Research Division Federal Reserve Bank of St. Louis 3 updated through 11/16/10 Monetary Trends M1 Percent change from year ago 21 14 7 0 -7 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 97 98 99 00 01 02 03 04 05 06 07 08 MZM Percent change from year ago 25 20 15 10 5 0 -5 93 94 95 M2 Percent change from year ago 12 9 6 3 0 -3 93 94 95 Monetary Services Index - M2** Percent change from year ago 15 10 5 0 -5 91 92 93 94 95 96 **We will not update the MSI series until we revise the code to accomodate the discontinuation of M3. Research Division 4 Federal Reserve Bank of St. Louis updated through 11/16/10 Monetary Trends Adjusted Monetary Base Percent change from year ago 120 100 80 60 40 20 0 -20 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Domestic Nonfinancial Debt Currency Held by the Nonbank Public Percent change from year ago Percent change from year ago 40 15 30 10 20 Total 10 5 Federal 0 -10 0 2003 2004 2005 2006 2007 2008 2009 2010 2007 2008 Small Denomination Time Deposits* Checkable Deposits Percent change from year ago Percent change from year ago 25.0 30 12.5 20 0.0 10 -12.5 0 -25.0 2009 2010 2009 2010 2009 2010 -10 2007 2008 2009 2010 2007 2008 Money Market Mutual Fund Shares Savings Deposits Percent change from year ago Percent change from year ago 60 30 Institutional Funds 20 30 10 Retail Funds 0 0 -30 -10 2007 2008 2009 2010 2007 2008 Research Division Federal Reserve Bank of St. Louis 5 updated through 11/16/10 Monetary Trends Adjusted and Required Reserves Billions of dollars 1500 1000 500 Required | | | Adjusted 0 93 94 95 96 97 98 99 00 01 Total Borrowings, nsa 02 03 04 05 06 07 08 09 10 Excess Reserves plus RCB Contracts Billions of dollars Billions of dollars 450 1200 300 800 150 400 0 0 2003 2004 2005 2006 2007 2008 2009 2010 99 00 2003 2004 2005 2006 2007 2008 2009 2010 03 04 05 06 07 08 09 10 06 07 08 09 10 * Data exclude term auction credit Nonfinancial Commercial Paper Percent change from year ago 60 30 0 -30 -60 93 94 95 96 97 98 01 02 As of April 10, 2006, the Federal Reserve Board made major changes to its commercial paper calculations. For more information, please refer to http://www.federalreserve.gov/releases/cp/about.htm. Consumer Credit Percent change from year ago 20 10 0 -10 93 94 95 96 97 98 99 00 01 02 03 04 05 Research Division 6 Federal Reserve Bank of St. Louis updated through 11/09/10 Monetary Trends Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans Percentage 90 Large & Medium Firms 60 30 Small Firms 0 -30 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans Percentage 90 60 30 0 -30 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Net Percentage of Domestic Banks Tightening Standards for Residential Mortgage Loans Percentage 80 60 40 20 0 -20 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 07 08 09 10 Net Percentage of Domestic Banks Tightening Standards for Consumer Loans Percentage 80 60 40 Credit Card Loans 20 0 Other Consumer Loans -20 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Research Division Federal Reserve Bank of St. Louis 7 updated through 11/02/10 Monetary Trends CPI Inflation and 1-Year-Ahead CPI Inflation Expectations Percent 6 5 Humphrey-Hawkins CPI Inflation Range 4 3 2 | | | | | | | | | | | | CPI Inflation 1 University of Michigan 0 -1 -2 Federal Reserve Bank of Philadelphia 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 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. 10-Year Ahead PCE Inflation Expectations and Realized Inflation Percent 8 6 4 2 Expected Realized 0 65 70 75 80 85 90 95 00 05 10 See the notes section for an explanation of the chart. Treasury Security Yield Spreads Real Interest Rates Yield to maturity Percent, Real rate = Nominal rate less year-over-year CPI inflation 6 6 10-Year less 3-Month T-Bill 4 4 2 1-Year Treasury Yield 2 0 0 || | | | | | 10-Year less 3-Year Note -2 Federal Funds Rate 3-Year less 3-Month T-Bill -2 01 02 03 04 05 06 07 08 09 10 -4 01 02 03 04 05 06 07 08 09 10 Research Division 8 Federal Reserve Bank of St. Louis updated through 11/02/10 Monetary Trends Short-Term Interest Rates Percent 12 10 Prime Rate 8 90-Day Commercial Paper 6 4 3-Month Treasury Yield 2 0 -2 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 07 08 09 10 Long-Term Interest Rates Percent 10 Conventional Mortgage 8 | | | | | | 6 4 Corporate Aaa 10-Year Treasury Yield 2 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Long-Term Interest Rates Short-Term Interest Rates Percent Percent 10 8 6 90-Day Commercial Paper 4 Corporate Baa 6 2 4 3-Month Treasury Yield 0 10-Year Treasury Yield 2 -2 2007 2008 2009 2010 2007 2008 2009 2010 FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate Percent 8 Intended Federal Funds Rate 6 Primary Credit Rate Discount Rate 4 2 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Research Division Federal Reserve Bank of St. Louis 9 updated through 11/16/10 Monetary Trends Federal Funds Rate and Inflation Targets Percent 10 4% 3% 2% 1% 0% Target Inflation Rates 5 Actual 0 -5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Calculated federal funds rate is based on Taylor's rule. Components of Taylor's Rule Actual and Potential Real GDP PCE Inflation Billions of chain-weighted 2005 dollars Percent change from year ago 15000 5 Potential 4 13000 3 Actual 2 11000 1 0 9000 -1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 See notes section for further explanation. Monetary Base Growth and Inflation Targets Percent 30 Target Inflation Rates Actual 15 0% 1% 2% 3% 4% 0 -15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Calculated base growth is based on McCallum's rule. Actual base growth is percent change from the previous quarter. *Actual values for 2008:Q4, 2009:Q1, and 2009:Q4 are 188.38 percent, 60.77 percent, and 56.51, respectively. Components of McCallum's Rule Monetary Base Velocity Growth Real Output Growth Percent Percent 15 Recursive Average 8 10-Year Moving Average | 0 | | 4 -15 -30 0 -45 1-Year Moving Average -60 Quarter to Quarter Growth Rate -4 -75 -8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Research Division 10 Federal Reserve Bank of St. Louis updated through 11/16/10 Monetary Trends Implied One-Year Forward Rates Rates on 3-Month Eurodollar Futures Percent 7 Percent, daily data 0.45 Week Ending: 11/06/09 10/08/10 11/05/10 6 5 Jan 2011 4 | | | | 0.35 3 2 Dec 2010 Nov 2010 1 0 2y 5y 3y 7y 10y 0.25 09/13 Rates on Selected Federal Funds Futures Contracts 09/20 09/27 10/04 10/11 10/18 10/25 11/01 11/08 11/15 Rates on Federal Funds Futures on Selected Dates Percent, daily data Percent 0.20 0.19 Nov 2010 0.19 Dec 2010 0.18 | | | | 0.17 09/17/2010 0.18 11/12/2010 0.17 0.16 0.16 10/15/2010 Jan 2011 0.15 0.15 09/13 09/20 09/27 10/04 10/11 10/18 10/25 11/01 11/08 11/15 Nov Jan Dec Feb Apr Mar Contract Month Inflation-Indexed Treasury Securities Inflation-Indexed Treasury Yield Spreads Weekly data Weekly data Percent Percent 4.00 4.00 1.67 1.67 -0.67 -0.67 20 -3.00 2008 15 10 2009 . 2010 2011 Maturity 5 20 -3.00 2008 15 10 2009 2010 . Note: Yields are inflation-indexed constant maturity U.S. Treasury securities 2011 5 Horizon Note: Yield spread is between nominal and inflation-indexed constant maturity U.S. Treasury securities. Inflation-Indexed 10-Year Government Notes Inflation-Indexed 10-Year Government Yield Spreads Percent, weekly data Percent, weekly data 5 4 4 3 3 U.S. 2 U.S. 2 1 1 0 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Note: Data is temporarily unavailable for the French and U.K. 10-Year Notes and Government Yield Spreads. Research Division Federal Reserve Bank of St. Louis 11 updated through 11/16/10 Monetary Trends Velocity Nominal GDP/MZM, Nominal GDP/M2 (Ratio Scale) 2.75 2.50 MZM 2.25 2.00 M2 1.75 1.50 1.25 12054 93 12419 94 12784 95 13149 96 13515 97 98 13880 14245 99 14610 00 14976 01 15341 02 15706 03 16071 04 16437 05 16802 06 17167 07 17532 08 17898 09 18263 10 18628 Interest Rates Percent 8 6 3-Month T-Bill 4 M2 Own 2 MZM Own 0 93 94 95 96 97 98 99 00 01 02 04 05 06 07 08 09 MZM Velocity and Interest Rate Spread M2 Velocity and Interest Rate Spread Ratio Scale Ratio Scale 3.50 10 2.25 Velocity = Nominal GDP / M2 Velocity = Nominal GDP / MZM 03 3.00 2.50 2.00 1.50 2.00 1.75 1.50 1974Q1 to 1993Q4 1994Q1 to present 1974Q1 to 1993Q4 1994Q1 to present 1.25 1.00 -1 0 3 5 6 8 9 10 11 1 2 4 7 Interest Rate Spread = 3-Month T-Bill less MZM Own Rate -1 0 3 5 6 1 2 4 Interest Rate Spread = 3-Month T-Bill less M2 Own Rate Research Division 12 Federal Reserve Bank of St. Louis updated through 11/16/10 Monetary Trends Gross Domestic Product Percent change from year ago 10 8 6 4 2 0 -2 -4 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 98 99 00 01 02 03 04 05 06 07 08 09 10 Dashed lines indicate 10-year moving averages. Real Gross Domestic Product Percent change from year ago 6 3 0 -3 -6 93 94 95 96 97 Dashed lines indicate 10-year moving averages. Gross Domestic Product Price Index Percent change from year ago 5 4 3 2 1 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 98 99 00 01 02 03 04 05 06 07 08 09 10 Dashed lines indicate 10-year moving averages. M2 Percent change from year ago 12 9 6 3 0 93 94 95 96 97 Dashed lines indicate 10-year moving averages. Research Division Federal Reserve Bank of St. Louis 13 updated through 11/16/10 Monetary Trends Bank Credit Percent change from year ago 15 10 5 0 -5 -10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2007 2008 2009 2010 2008 2009 2010 Investment Securities in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 2001 2002 2003 2004 2005 2006 Total Loans and Leases in Bank Credit at Commercial Banks Percent change from year ago 15 10 5 0 -5 -10 -15 2001 2002 2003 2004 2005 2006 2007 Commercial and Industrial Loans at Commercial Banks Percent change from year ago 30 15 0 -15 -30 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Research Division 14 Federal Reserve Bank of St. Louis updated through 11/09/10 Monetary Trends Standard & Poor's 500 1800 150 1440 120 Composite Index (left) 1080 90 720 60 Price/Earnings Ratio (right) 360 30 0 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Recent Inflation and Long-Term Interest Rates Consumer Price Inflation Rates Percent change from year ago 2009Q4 2010Q1 2010Q2 Long-Term Government Bond Rates 2010Q3 Percent Aug10 Sep10 Jul10 Oct10 United States 1.46 2.42 1.77 1.22 3.01 2.70 2.65 2.54 Canada 0.79 1.61 1.40 1.83 3.20 2.98 2.87 2.78 France 0.36 1.32 1.61 1.53 2.99 2.68 2.68 . Germany 0.44 0.81 1.06 1.18 2.62 2.35 2.30 2.35 Italy Japan United Kingdom 0.65 1.29 1.41 1.62 4.03 3.80 3.86 . -2.03 -1.12 -0.93 -0.83 1.08 1.02 0.90 . 2.09 3.26 3.44 3.10 3.48 3.20 3.11 3.06 * Copyright , 2010, Organisation for Economic Cooperation and Development, OECD Main Economic Indicators (www.oecd.org). Inflation and Long-Term Interest Rate Differentials Percent Percent 2 4 U.K. Germany 2 0 U.K. Canada 0 -2 -2 Germany Canada Japan Inflation differential = Foreign inflation less U.S. inflation Long-term rate differential = Foreign rate less U.S. rate -4 Japan -4 2007 2008 2009 2010 2007 2008 2009 2010 Research Division Federal Reserve Bank of St. Louis 15 updated through 11/16/10 Monetary Trends Money Stock Bank Adjusted M1 MZM M2 M3* Credit Monetary Base Reserves 2005. 1371.536 6709.741 6525.151 9786.477 7015.091 806.622 96.554 343.539 2006. 1374.163 7000.945 6868.146 10270.74 7697.040 835.035 94.908 . 2007. 1372.079 7635.149 7300.241 . 8462.623 850.529 94.145 . 2008. 1432.773 8708.061 7820.320 . 9122.749 1010.130 232.534 . 2009. 1634.793 9538.280 8434.798 . 9190.798 1796.550 944.772 . MSI M2** 2008 1 1384.588 8384.447 7615.259 . 8999.867 856.338 96.192 . . 2 1392.554 8664.431 7730.396 . 9011.612 860.033 95.081 . . 3 1423.716 8773.390 7826.426 . 9068.211 893.439 118.518 . . 4 1530.235 9009.974 8109.200 . 9411.306 1430.709 620.346 . 2009 1 1578.270 9414.578 8361.120 . 9329.186 1662.925 820.597 . . 2 1621.077 9552.027 8417.984 . 9294.851 1763.628 917.017 . . 3 1653.063 9586.193 8440.664 . 9136.651 1747.186 895.441 . . 4 1686.761 9600.321 8519.425 . 9002.503 2012.460 1146.032 . 2010 1 1702.865 9497.685 8517.190 . 8919.104 2089.180 1217.002 . . 2 1709.628 9389.551 8556.058 . 9214.388 2034.276 1158.344 . . 3 1741.626 9522.231 8653.959 . 9224.525 2003.651 1117.932 . 2008 Oct 1471.731 8846.032 8009.842 . 9493.317 1142.152 347.604 . . Nov 1516.919 8972.642 8062.465 . 9385.134 1480.740 674.070 . . Dec 1602.055 9211.248 8255.292 . 9355.466 1669.236 839.363 . 2009 Jan 1583.473 9343.138 8316.718 . 9332.244 1730.151 869.931 . . Feb 1573.980 9413.828 8356.720 . 9348.492 1590.149 758.576 . . Mar 1577.358 9486.769 8409.921 . 9306.821 1668.474 833.284 . . Apr 1608.533 9473.300 8364.291 . 9264.930 1787.690 949.281 . . May 1608.536 9580.607 8436.668 . 9322.693 1799.205 946.080 . . Jun 1646.162 9602.174 8452.994 . 9296.929 1703.989 855.691 . . Jul 1649.944 9600.506 8442.977 . 9202.656 1693.712 841.475 . . Aug 1648.424 9561.480 8419.718 . 9143.923 1728.112 879.587 . . Sep 1660.820 9596.594 8459.298 . 9063.375 1819.734 965.262 . . Oct 1676.190 9599.932 8492.133 . 8974.661 1975.378 1122.194 . . Nov 1687.506 9607.092 8523.343 . 9033.627 2044.689 1182.377 . . Dec 1696.588 9593.940 8542.798 . 8999.221 2017.312 1133.526 . 2010 Jan 1680.736 9523.959 8486.026 . 8936.817 2010.109 1105.435 . . Feb 1714.782 9529.017 8545.671 . 8878.969 2150.910 1296.160 . . Mar 1713.078 9440.078 8519.874 . 8941.525 2106.522 1249.412 . . . Apr 1701.379 9349.041 8490.575 . 9264.847 2044.296 1178.993 . May 1706.038 9400.684 8573.015 . 9210.519 2034.541 1149.754 . . Jun 1721.466 9418.929 8604.584 . 9167.798 2023.991 1146.284 . . Jul 1716.438 9437.097 8603.336 . 9213.461 2015.187 1131.072 . . Aug 1742.817 9514.664 8649.450 . 9229.413 2014.639 1133.729 . . Sep 1765.622 9614.933 8709.091 . 9230.702 1981.127 1088.994 . . Oct 1779.030 9694.637 8766.091 . 9243.960 1998.474 1099.725 . Note: All values are given in billions of dollars. *See table of contents for changes to the series. **We will not update the MSI series until we revise the code to accommodate the discontinuation of M3. Research Division 16 Federal Reserve Bank of St. Louis updated through 11/09/10 Monetary Trends Federal Primary Prime 3-mo Funds Credit Rate Rate CDs 3-mo Treasury Yields 3-yr 10-yr Corporate Municipal Aaa Bonds Aaa Bonds Conventional Mortgage 2005. 2006. 2007. 2008. 2009. 3.21 4.96 5.02 1.93 0.16 4.19 5.96 5.86 2.39 0.50 6.19 7.96 8.05 5.09 3.25 3.51 5.15 5.27 2.97 0.56 3.21 4.85 4.47 1.39 0.15 3.93 4.77 4.34 2.24 1.43 4.29 4.79 4.63 3.67 3.26 5.23 5.59 5.56 5.63 5.31 4.28 4.15 4.13 4.58 4.27 5.86 6.41 6.34 6.04 5.04 2008 . . . 1 2 3 4 3.18 2.09 1.94 0.51 3.67 2.33 2.25 1.31 6.21 5.08 5.00 4.06 3.23 2.76 3.06 2.82 2.09 1.65 1.52 0.30 2.17 2.67 2.63 1.48 3.66 3.89 3.86 3.25 5.46 5.60 5.65 5.82 4.39 4.43 4.50 5.02 5.88 6.09 6.31 5.87 2009 . . . 1 2 3 4 0.18 0.18 0.16 0.12 0.50 0.50 0.50 0.50 3.25 3.25 3.25 3.25 1.08 0.62 0.30 0.22 0.22 0.17 0.16 0.06 1.27 1.49 1.56 1.39 2.74 3.31 3.52 3.46 5.27 5.51 5.27 5.20 4.64 4.43 4.11 3.91 5.06 5.03 5.16 4.92 2010 . . 1 2 3 0.13 0.19 0.19 0.61 0.75 0.75 3.25 3.25 3.25 0.21 0.42 0.34 0.11 0.15 0.16 1.47 1.38 0.83 3.72 3.49 2.79 5.29 5.04 4.58 3.93 3.83 3.58 5.00 4.91 4.45 2008 Oct . Nov . Dec 0.97 0.39 0.16 1.81 1.25 0.86 4.56 4.00 3.61 4.32 2.36 1.77 0.69 0.19 0.03 1.86 1.51 1.07 3.81 3.53 2.42 6.28 6.12 5.05 5.05 4.83 5.17 6.20 6.09 5.33 2009 Jan . Feb . Mar 0.15 0.22 0.18 0.50 0.50 0.50 3.25 3.25 3.25 1.02 1.16 1.07 0.13 0.30 0.22 1.13 1.37 1.31 2.52 2.87 2.82 5.05 5.27 5.50 4.64 4.56 4.74 5.06 5.13 5.00 . . . Apr May Jun 0.15 0.18 0.21 0.50 0.50 0.50 3.25 3.25 3.25 0.89 0.57 0.39 0.16 0.18 0.18 1.32 1.39 1.76 2.93 3.29 3.72 5.39 5.54 5.61 4.48 4.26 4.56 4.81 4.86 5.42 . . . Jul Aug Sep 0.16 0.16 0.15 0.50 0.50 0.50 3.25 3.25 3.25 0.35 0.30 0.25 0.18 0.17 0.12 1.55 1.65 1.48 3.56 3.59 3.40 5.41 5.26 5.13 4.36 4.17 3.81 5.22 5.19 5.06 . . . Oct Nov Dec 0.12 0.12 0.12 0.50 0.50 0.50 3.25 3.25 3.25 0.24 0.21 0.22 0.07 0.05 0.05 1.46 1.32 1.38 3.39 3.40 3.59 5.15 5.19 5.26 3.85 3.99 3.89 4.95 4.88 4.93 2010 Jan . Feb . Mar 0.11 0.13 0.16 0.50 0.59 0.75 3.25 3.25 3.25 0.20 0.19 0.23 0.06 0.11 0.15 1.49 1.40 1.51 3.73 3.69 3.73 5.26 5.35 5.27 3.96 3.91 3.91 5.03 4.99 4.97 . . . Apr May Jun 0.20 0.20 0.18 0.75 0.75 0.75 3.25 3.25 3.25 0.30 0.45 0.52 0.16 0.16 0.12 1.64 1.32 1.17 3.85 3.42 3.20 5.29 4.96 4.88 3.95 3.75 3.81 5.10 4.89 4.74 . . . Jul Aug Sep 0.18 0.19 0.19 0.75 0.75 0.75 3.25 3.25 3.25 0.41 0.32 0.28 0.16 0.16 0.15 0.98 0.78 0.74 3.01 2.70 2.65 4.72 4.49 4.53 3.69 3.44 3.63 4.56 4.43 4.35 . Oct 0.19 0.75 3.25 0.27 0.13 0.57 2.54 4.68 3.62 4.23 Note: All values are given as a percent at an annual rate. Research Division Federal Reserve Bank of St. Louis 17 updated through 11/16/10 Monetary Trends M1 MZM M2 M3* Percent change at an annual rate 2005. 2006. 2007. 2008. 2009. 2.04 0.19 -0.15 4.42 14.10 2.11 4.34 9.06 14.05 9.53 4.25 5.26 6.29 7.12 7.86 5.97 4.95 . . . 2008 . . . 1 2 3 4 2.63 2.30 8.95 29.93 15.74 13.36 5.03 10.79 7.90 6.05 4.97 14.45 . . . . 2009 . . . 1 2 3 4 12.56 10.85 7.89 8.15 17.96 5.84 1.43 0.59 12.43 2.72 1.08 3.73 . . . . 2010 . . 1 2 3 3.82 1.59 7.49 -4.28 -4.55 5.65 -0.10 1.83 4.58 . . . 2008 Oct . Nov . Dec 10.92 36.84 67.35 6.45 17.18 31.91 17.60 7.88 28.70 . . . 2009 Jan . Feb . Mar -13.92 -7.19 2.58 17.18 9.08 9.30 8.93 5.77 7.64 . . . . . . Apr May Jun 23.72 0.00 28.07 -1.70 13.59 2.70 -6.51 10.38 2.32 . . . . . . Jul Aug Sep 2.76 -1.11 9.02 -0.21 -4.88 4.41 -1.42 -3.31 5.64 . . . . . . Oct Nov Dec 11.11 8.10 6.46 0.42 0.90 -1.64 4.66 4.41 2.74 . . . 2010 Jan . Feb . Mar -11.21 24.31 -1.19 -8.75 0.64 -11.20 -7.97 8.43 -3.62 . . . . . . Apr May Jun -8.20 3.29 10.85 -11.57 6.63 2.33 -4.13 11.65 4.42 . . . . . . Jul Aug Sep -3.50 18.44 15.70 2.31 9.86 12.65 -0.17 6.43 8.27 . . . . Oct 9.11 9.95 7.85 . *See table of contents for changes to the series. Research Division 18 Federal Reserve Bank of St. Louis Monetary Trends Definitions 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. MZM (money, zero maturity): M2 minus small-denomination time deposits, plus institutional money market mutual funds (that is, those included in M3 but excluded from M2). The label MZM was coined by William Poole (1991); the aggregate itself was proposed earlier by Motley (1988). M2: M1 plus savings deposits (including money market deposit accounts) and small-denomination (under $100,000) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments under $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 nonfinancial firms. End-of-period basis. 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, 2001, 2003). 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 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, 2001, 2003). Monetary Services Index: An index that 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, with additional data at research.stlouisfed.org/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 Statistical Supplement to the 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. Notes Page 3: 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 Anderson and Rasche (2001) and research.stlouisfed.org/aggreg/swdata.html. Primary Credit Rate, Discount Rate, and Intended 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. The Treasury Yield Curve and Real Treasury Yield Curve show constant maturity yields calculated by the U.S. Treasury for securities 5, 7, 10, and 20 years to maturity. Inflation-Indexed Treasury Yield Spreads are a measure of inflation compensation at those horizons, and it is simply the Research Division Federal Reserve Bank of St. Louis nominal constant maturity yield less the real constant maturity yield. Daily data and descriptions are available at research.stlouisfed.org/fred2/. See also Statistical Supplement to the Federal Reserve Bulletin, table 1.35. The 30-year constant maturity series was discontinued by the Treasury as of February 18, 2002. Page 5: Checkable Deposits is the sum of demand and other checkable deposits. Savings Deposits is the sum of money market deposit accounts and passbook and statement savings. Time Deposits have a minimum initial maturity of 7 days. Retail Money Market Mutual Funds are included in M2. Institutional money market funds are not included in M2. Page 6: 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 Statistical Supplement to the Federal Reserve Bulletin, table 1.55. Page 7: Data are reported in the Senior Loan Officer Opinion Survey on Bank Lending Practices. 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 (FOMC) range as reported to the Congress in the February testimony that accompanies the Monetary Policy Report to the Congress. Beginning February 2000, the FOMC began using the personal consumption expenditures (PCE) price index to report its inflation range; the FOMC then switched to the PCE chain-type price index excluding food and energy prices (“core”) beginning July 2004. Accordingly, neither are shown on this graph. CPI Inflation is the percentage change from a year ago in the consumer price index for all urban consumers. Real Interest Rates are ex post measures, equal to nominal rates minus year-over-year CPI inflation. From 1991 to the present the source of the long-term PCE inflation expectations data is the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. Prior to 1991, the data were obtained from the Board of Governors of the Federal Reserve System. Realized (actual) inflation is the annualized rate of change for the 40-quarter period that corresponds to the forecast horizon (the expectations measure). For example, in 1965:Q1, annualized PCE inflation over the next 40 quarters was expected to average 1.7 percent. In actuality, the average annualized rate of change measured 4.8 percent from 1965:Q1 to 1975:Q1. Thus, the vertical distance between the two lines in the chart at any point is the forecast error. Page 9: FOMC Intended Federal Funds Rate is the level (or midpoint of the range, if applicable) of the federal funds rate that the staff of the FOMC expected to be consistent with the desired degree of pressure on bank reserve positions. In recent years, the FOMC has set an explicit target for the federal funds rate. 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 + π t –1 + (π t –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, π t –1 is the previous period’s inflation rate (PCE) measured on a year-over-year basis, yt –1 is the log of the previous period’s level of real gross domestic product (GDP), and yt –1P is the log of an estimate of the previous period’s level of potential output. Potential Real GDP is estimated by the Congressional Budget Office (CBO). Monetary Base Growth and Inflation Targets shows the quarterly growth of the adjusted monetary base implied by applying McCallum’s (2000, p. 52) equation Δbt = Δxt* − Δvta + λ ( Δxt* − Δxt −1 ), Δxt* = π * + Δyt* to five alternative target inflation rates, π* = 0, 1, 2, 3, 4 percent, where Δbt is the implied growth rate of the adjusted monetary base, Δy*t is the 10-year 19 Monetary Trends moving average growth in real GDP, Δνtα is the average base velocity growth (calculated recursively), Δxt–1 is the lag growth rate of nominal GDP, and λ = 0.5. 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,..., 10 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), R(m) = a0 + (a1 + a2 )(1 – e–m/50 )/(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)], where duration is approximated as D(m) = (1 – e –R(m) × m)/R(m). These rates are linear approximations to the true instantaneous forward rates; see Shiller (1990). 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 Federal Funds Futures Contracts trace through time the yield on three specific contracts. Rates on Federal Funds Futures on Selected Dates displays a single day’s snapshot of yields for contracts expiring in the months shown on the horizontal axis. Inflation-Indexed Treasury Securities and Yield Spreads are those plotted on page 3. Inflation-Indexed 10-Year Government Notes shows the yield of an inflation-indexed note that is scheduled to mature in approximately (but not greater than) 10 years. The current French note has a maturity date of 7/25/2015, the current U.K. note has a maturity date of 4/16/2020, and the current U.S. note has a maturity date of 5/15/2020. Inflation-Indexed Treasury Yield Spreads and InflationIndexed 10-Year Government Yield Spreads equal the difference between the yields on the most recently issued inflation-indexed securities and the unadjusted security yields of similar maturity. 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. Prior to 1982, the 3-month T-bill rates are secondary market yields. From 1982 forward, rates are 3-month constant maturity yields. Page 13: Real Gross Domestic Product is GDP as measured in chained 2000 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 2005 dollars. Page 14: Investment Securities are all securities held by commercial banks in both investment and trading accounts. Page 15: Inflation Rate Differentials are the differences between the foreign consumer price inflation rates and year-over-year changes in the U.S. all-items Consumer Price Index. Page 17: Treasury Yields are Treasury constant maturities as reported in the Board of Governors of the Federal Reserve System’s H.15 release. Sources Agence France Trésor: French note yields. Bank of Canada: Canadian note yields. Bank of England: U.K. note yields. Board of Governors of the Federal Reserve System: Monetary aggregates and components: 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 release. Nonfinancial commercial paper: Board of Governors website. Nonfinancial debt: Z.1 release. M2 own rate. Senior Loan Officer Opinion Survey on Bank Lending Practices. 20 Bureau of Economic Analysis: GDP. Bureau of Labor Statistics: CPI. Chicago Board of Trade: Federal funds futures contract. Chicago Mercantile Exchange: Eurodollar futures. Congressional Budget Office: Potential real GDP. Federal Reserve Bank of Philadelphia: Survey of Professional Forecasters inflation expectations. Federal Reserve Bank of St. Louis: Adjusted monetary base and adjusted reserves, monetary services index, MZM own rate, one-year forward rates. Organization for Economic Cooperation and Development: International interest and inflation rates. Standard & Poor’s: Stock price-earnings ratio, stock price composite index. University of Michigan Survey Research Center: Median expected price change. U.S. Department of the Treasury: U.S. 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, 78(2), 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, 78(6), pp. 3-37.* ____ and ____(2001). “Retail Sweep Programs and Bank Reserves, 19941999,” Federal Reserve Bank of St. Louis Review, January/February, 83(1), pp. 51-72.* ____ and ____ , with Jeffrey Loesel (2003). “A Reconstruction of the Federal Reserve Bank of St. Louis Adjusted Monetary Base and Reserves,” Federal Reserve Bank of St. Louis Review, September/October, 85(5), pp. 39-70.* ____ , 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, 79(1), pp. 31-82.* McCallum, Bennett T. (2000). “Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japa,” Federal Reserve Bank of Richmond Economic Quarterly, vol. 86/1, Winter. 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,” CarnegieRochester Conference Series on Public Policy, vol. 39, pp. 195-214. Note: *Available on the Internet at research.stlouisfed.org/publications/review/. Research Division Federal Reserve Bank of St. Louis
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