Full text of Monetary Trends : June 2003
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MonetaryTrends June 2003 Why Predict Past FOMC Actions? T how the information on target changes improves the precision of the forecasts. It is striking that when the information on last month’s target change is included, the adjusted R-squared measure of fit more than doubles, from 21 percent to 44 percent. Furthermore, the lagged change in the monthly average becomes statistically insignificant, once the information regarding the previous month’s target change is included in the regression. In fact, the coefficient on the target change variable is slightly greater than (though not significantly different from) 1.0. A coefficient greater than 1 would imply that a target change in one month tends to precede an additional target change in the same direction the next month. Such a prediction would be consistent with the view that the FOMC has active and passive periods and target changes tend to be in the same direction during each active period. The bottom line is that any forecasting model of the monthly average of the federal funds rate that does not take into account known, past FOMC target changes unnecessarily handicaps itself in forecast comparisons with the federal funds futures market, where profitmotivated traders follow FOMC policy actions closely. he daily effective federal funds rate contains noise—that is, departures from the target level established by the Federal Open Market Commitee (FOMC) that reflect idiosyncratic conditions in the interbank loan market. Averaging the daily data across a month or quarter is one way to cancel most of this noise, and, for this reason, the monthly or quarterly average of the daily federal funds rate has become a widely used measure of monetary policy. The first chart on page 10 of this publication, for example, plots a quarterly average as the actual federal funds rate in a Taylor rule description of monetary policy. The monthly average is also the benchmark for payoffs in the federal funds futures market. One often-neglected consequence of monthly averaging, however, is that any change in the target federal funds rate will affect the monthly average for two months. For example, if the FOMC raised the target by 50 basis points precisely halfway through this month, then the monthly —Michael Dueker average for this month will rise by 25 basis points relative to last month, and next month’s average will also exceed this month’s average by 25 basis points, all else equal. Similarly, if the FOMC Squared Forecast Errors for Monthly Average of raised the target by 50 basis points threeFederal Funds Rate quarters of the way through this month, (12-Month Moving Average) then the expected monthly average for the 0.08 next month would rise by 37.5 basis points. Using previous month’s FOMC target change(s) To gauge how strongly target changes in Ignoring last month’s FOMC target change(s) 0.07 one month affect the change in the monthly 0.06 average funds rate from that month to the 0.05 next, I estimated two regressions of the change in the monthly average on its own 0.04 lagged value. In one regression, I also 0.03 included information about how the size and timing of any target change in the 0.02 previous month would affect this month’s 0.01 average. The sample period covered 0 January 1984 through March 2003. The Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 90 91 92 93 94 95 96 97 98 99 00 01 02 03 accompanying chart plots the squared forecast errors from both regressions and shows Views expressed do not necessarily reflect official positions of the Federal Reserve System. Available on the web at 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 Monetary Aggregates: Monthly Growth Reserves Markets and Short-Term Credit Flows Measures of Expected Inflation Interest Rates Policy-Based Inflation Indicators Implied Forward Rates, Futures Contracts, and Inflation-Protected 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. Except where otherwise noted, solid shading indicates recessions, as determined by the National Bureau of Economic Research. The NBER has not yet determined the end of the recession that began in March 2001; however, the hatched shading indicates this recession ended in November 2001, as determined by a statistical model for dating business cycle turning points developed by Marcelle Chauvet (“An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, November 1998, pp. 969-96) and discussed by Marcelle Chauvet and Jeremy Piger (“Identifying Business Cycle Turning Points in Real Time,” Federal Reserve Bank of St. Louis Review, March/April 2003, pp. 47-62). 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: [(xt /x t – 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: [(xt /x t – 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 or to: stlsFRED@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 to the Public Affairs Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442 or by calling (314) 444-8809. Subscription forms may also be completed online at research.stlouisfed.org/order/pubform.php. For more information on data in this publication, please visit research.stlouisfed.org/fred or call (314) 444-8590. The entire publication is also available on the Internet at research.stlouisfed.org/publications/mt. updated through 05/19/03 Monetary Trends Reserve Market Rates M2 and MZM Billions of dollars Percent 6400 7.00 Effective Federal Funds Rate Intended Federal Funds Rate 6.50 6150 6.00 5900 5.50 5.00 5650 M2 4.50 5400 4.00 5150 3.50 3.00 4900 Primary Credit Rate 2.50 Discount Rate 2.00 4650 MZM 1.50 4400 1.00 4150 0.50 2000 2000 2001 2001 2002 2002 2003 2003 2004 Adjusted Monetary Base 2000 2000 2001 2001 2002 2002 2003 2003 2004 Treasury Yield Curve Percent change at an annual rate Percent 60 6.0 50 5.5 5.0 40 Week Ending: 05/17/02 04/18/03 05/16/03 4.5 30 4.0 20 3.5 10 3.0 0 2.5 -10 2.0 -20 1.5 -30 1.0 2000 2000 2001 2001 2002 2002 2003 2003 3m 1y 2y 3y 5y 7y 10y 2004 Total Bank Credit Interest Rates Feb 03 Mar 03 Apr 03 Federal Funds Rate 1.26 1.25 1.26 Prime Rate 4.25 4.25 4.25 Primary Credit Rate 2.25 2.25 2.25 Conventional Mortgage Rate 5.84 5.75 Percent change at an annual rate 50 40 30 . Treasury Yields Treasury Yields: 20 10 0 . . 5.81 . . . 3-Month Constant Maturity 1.19 1.15 1.15 6-Month Constant Maturity 1.20 1.16 1.17 1-Year Constant Maturity 1.30 1.24 1.27 3-Year Constant Maturity 2.05 1.98 2.06 5-Year Constant Maturity 2.90 2.78 2.93 10-Year Constant Maturity 3.90 3.81 3.96 -10 2000 2000 2001 2001 2002 2002 2003 2003 2004 Research Division Federal Reserve Bank of St. Louis 3 updated through 05/19/03 Monetary Trends MZM and M1 Percent change from year ago 25 20 15 10 MZM 5 0 M1 -5 -10 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 M2 Percent change from year ago 15 10 5 0 -5 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 M3 Percent change from year ago 15 10 5 0 -5 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 Monetary Services Index - M2 Percent change from year ago 15 10 5 0 -5 86 1986 87 1987 88 1988 89 1989 90 1990 91 1991 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 2004 Research Division 4 Federal Reserve Bank of St. Louis updated through 05/20/03 Monetary Trends Adjusted Monetary Base Percent change from year ago 20 15 10 5 0 -5 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 98 1998 1999 99 00 2000 2001 01 2002 02 2003 Domestic Nonfinancial Debt Currency Held by the Nonbank Public Percent change from year ago Percent change from year ago 03 2004 15 15 10 Total 10 5 0 5 Federal -5 -10 0 1995 1996 1997 1998 1999 2000 2001 2002 1995 1996 1997 1998 1999 2000 2001 2002 2003 2000 2000 2001 2001 2002 2002 2003 Time Deposits Checkable and Savings Deposits Percent change from year ago Percent change from year ago 30 2003 2004 30 25 25 Large Denomination 20 20 15 15 10 10 5 5 0 0 -5 -5 Small Denomination -10 Savings -10 -15 Checkable -15 2000 2000 2001 2001 2002 2002 2003 2003 2004 Money Market Mutual Fund Shares 2000 2000 2001 2001 2002 2002 2003 2004 Repurchase Agreements and Eurodollars Percent change from year ago Billions of dollars 60 50 Institutional Funds 40 2003 Billions of dollars 550 400 500 350 450 300 30 Repos (left) 400 250 20 350 10 Retail Funds 200 Eurodollars (right) 300 0 -10 150 250 2000 2000 2001 2001 2002 2002 2003 2003 100 2000 2001 2002 2003 2004 Research Division Federal Reserve Bank of St. Louis 5 updated through 05/19/03 Monetary Trends M1 Percent change at an annual rate 80 60 40 20 0 -20 -40 -60 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 MZM Percent change at an annual rate 40 30 20 10 0 -10 -20 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 M2 Percent change at an annual rate 40 30 20 10 0 -10 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 M3 Percent change at an annual rate 40 30 20 10 0 -10 86 1986 87 1987 88 1988 89 1989 90 1990 91 1991 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 2004 Research Division 6 Federal Reserve Bank of St. Louis updated through 05/19/03 Monetary Trends Adjusted and Required Reserves Billions of dollars 100 80 Adjusted 60 Required 40 20 0 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 Total Borrowings, nsa Excess Reserves plus RCB Contracts Billions of dollars Billions of dollars 3.5 28 3.0 24 2.5 03 2004 20 2.0 16 1.5 12 1.0 8 0.5 0.0 4 1996 1996 1997 1998 1999 2000 2001 2002 2003 1997 1998 1999 2000 2001 2002 2003 2004 1996 1997 1998 1999 2000 2001 2002 2003 1996 1997 1998 1999 2000 2001 2002 2003 2004 Nonfinancial Commercial Paper Percent change from year ago 60 40 20 0 -20 -40 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 Consumer Credit Percent change from year ago 20 15 10 5 0 -5 -10 86 1986 87 1987 88 1988 89 1989 90 1990 91 1991 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 2004 Research Division Federal Reserve Bank of St. Louis 7 updated through 05/16/03 Monetary Trends Inflation and Inflation Expectations Percent 10 8 6 Federal Reserve Bank of Philadelphia Humphrey-Hawkins CPI Inflation Range 4 University of Michigan 2 CPI Inflation 0 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 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 notes on page 19. Treasury Security Yield Spreads Yield to maturity 6 10-Year less 3-Month T-Bill 4 2 0 10-Year less 3-Year T-Bill 3-Year less 3-Month T-Bill -2 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 Real Interest Rates Percent, Real rate = Nominal rate less CPI inflation 8 6 1-Year Treasury Yield 4 2 Federal Funds Rate 0 -2 86 1986 87 1987 88 1988 89 1989 90 1990 91 1991 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 2004 Research Division 8 Federal Reserve Bank of St. Louis updated through 05/06/03 Monetary Trends Short-Term Interest Rates Percent 14 90-Day Commercial Paper 12 10 8 Prime Rate 6 4 3-Month Treasury Yield 2 0 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 02 2002 2003 03 2004 Long-Term Interest Rates Percent 13 Conventional Mortgage 11 9 7 Corporate Aaa 5 10-Year Treasury Yield 3 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 Long-Term Interest Rates Short-Term Interest Rates Percent Percent 9 2001 01 02 2002 2003 03 2004 9 8 8 90-Day Commercial Paper 7 Corporate Baa 7 6 5 6 3-Month Treasury Yield 4 5 3 10-Year Treasury Yield 2 4 1 3 0 2000 2000 2001 2001 2002 2002 2003 2003 2004 2000 2000 2001 2001 2002 2002 2003 2003 2004 FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate Percent 12 10 Intended Federal Funds Rate 8 6 Discount Rate Primary Credit Rate 4 2 0 86 1986 87 1987 88 1988 89 1989 90 1990 91 1991 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 2004 Research Division Federal Reserve Bank of St. Louis 9 updated through 05/20/03 Monetary Trends Federal Funds Rate and Inflation Targets Percent 12 4% 3% 2% 1% 0% Target Inflation Rates 9 Actual 6 3 0 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 Calculated federal funds rate is based on Taylor’s rule. See notes on page 19. 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 Components of Taylor’s Rule Actual and Potential Real GDP PCE Inflation and Projections Percent change from year ago Billions of chain-weighted 1996 dollars 10000 6 9500 5 Actual 9000 4 8500 3 Potential 8000 2 7500 1 7000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 The shaded region shows the range of projections published in the Monetary Policy Report to Congress. Monetary Base Growth* and Inflation Targets Percent 12 Actual 9 6 3 Target Inflation Rates 0% 1% 2% 3% 4% 0 1994 94 95 1995 1996 96 97 1997 98 1998 99 1999 00 2000 2001 01 2002 02 2003 03 *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. 04 Components of McCallum’s Rule Monetary Base Velocity Growth Real Output Growth Percent Percent 8 8 1-Year Moving Average 1-Year Moving Average 4 4 10-Year Moving Average 0 0 4-Year Moving Average -4 -8 -4 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 1994 04 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 04 Research Division 10 Federal Reserve Bank of St. Louis updated through 05/19/03 Monetary Trends Implied One-Year Forward Rates Rates on 3-Month Eurodollar Futures Percent, daily data Percent 8 6 1.4 Week Ending: 05/17/02 04/18/03 05/16/03 May 2003 4 1.2 2 1.1 0 Jun 2003 1.3 2y 3y 5y 7y 10y || || | Jul 2003 1.0 03/17 Rates on Selected Federal Funds Futures Contracts 03/24 03/31 04/07 04/14 04/21 04/28 05/05 05/12 05/19 Rates on Federal Funds Futures on Selected Dates Percent, daily data Percent 1.3 1.3 May 2003 1.2 1.2 Jun 2003 04/11/2003 1.1 1.1 Jul 2003 1.0 1.0 0.9 0.9 03/14/2003 05/16/2003 03/17 03/24 03/31 04/07 04/14 04/21 04/28 05/05 05/12 05/19 May Jun Jul Aug Sep Oct Contract Month Inflation-Indexed Treasury Bonds Inflation-Indexed Treasury Yield Spreads Percent, weekly data Percent, weekly data 4 5.0 4.5 3 4.0 30-Year 3.5 2 30-Year 3.0 10-Year 2.5 10-Year 1 2.0 1.5 0 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 Inflation-Indexed 30-Year Government Bonds Inflation-Indexed 10-Year Government Bonds Percent, weekly data Percent, weekly data 6 6 5 5 U.S. U.S. Canada 4 4 3 3 2 2 U.K. 1 1999 14245 2000 14610 2001 14976 1 2002 15341 U.K. 2003 15706 1999 16071 14245 2000 14610 2001 14976 2002 15341 2003 15706 16071 Research Division Federal Reserve Bank of St. Louis 11 updated through 05/20/03 Monetary Trends Velocity Nominal GDP/MZM, Nominal GDP/M2 (Ratio Scale) 3.00 2.75 MZM 2.50 2.25 M2 2.00 1.75 1.50 9497 86 9862 87 10227 88 10593 89 10958 90 11323 91 11688 92 12054 93 12419 94 12784 95 13149 96 13515 97 13880 98 14245 99 14610 00 14976 01 15341 02 15706 03 16071 Interest Rates Percent 10 8 6 3-Month T-Bill 4 M2 Own MZM Own 2 0 86 9862 87 10227 88 10593 89 10958 90 11323 91 11688 92 12054 93 12419 94 12784 95 13149 96 13515 97 13880 98 14245 99 14610 00 14976 01 15341 02 15706 MZM Velocity and Interest Rate Spread M2 Velocity and Interest Rate Spread Ratio Scale Ratio Scale 3.50 03 16071 2.25 Velocity = Nominal GDP / M2 Velocity = Nominal GDP / MZM 9497 3.00 2.50 2.00 2.00 1.75 1.50 1974Q1 to 1993Q4 1994Q1 to present 1974Q1 to 1993Q4 1994Q1 to present 1.25 1.50 0 1 2 3 4 5 6 7 8 9 10 11 Interest Rate Spread = 3-Month T-Bill less MZM Own Rate 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 Interest Rate Spread = 3-Month T-Bill less M2 Own Rate Research Division 12 Federal Reserve Bank of St. Louis updated through 05/20/03 Monetary Trends Gross Domestic Product Percent change from year ago 20 15 10 5 0 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 Dashed lines indicate 10-year moving averages. Real Gross Domestic Product Percent change from year ago 15 10 5 0 -5 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 Dashed lines indicate 10-year moving averages. Gross Domestic Product Price Index Percent change from year ago 20 15 10 5 0 1986 86 1987 87 1988 88 1989 89 1990 90 1991 91 1992 92 1993 93 1994 94 1995 95 1996 96 1997 97 1998 98 1999 99 2000 00 2001 01 2002 02 2003 03 2004 Dashed lines indicate 10-year moving averages. M2 Percent change from year ago 20 15 10 5 0 86 1986 87 1987 88 1988 89 1989 90 1990 91 1991 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 2004 Dashed lines indicate 10-year moving averages. Research Division Federal Reserve Bank of St. Louis 13 updated through 05/20/03 Monetary Trends Bank Credit Percent change from year ago 20 15 10 5 0 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 Investment Securities in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 Total Loans and Leases in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 Commercial and Industrial Loans at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 -10 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 Research Division 14 Federal Reserve Bank of St. Louis updated through 05/16/03 Monetary Trends Standard & 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 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Recent Inflation and Long-Term Interest Rates Consumer Price Inflation Rates Long-Term Government Bond Rates Percent change from year ago 2002Q2 2002Q3 2002Q4 2003Q1 Percent Feb03 Mar03 Jan03 Apr03 United States 1.24 1.58 2.25 2.87 4.05 3.90 3.81 3.96 Canada 1.33 2.33 3.79 4.47 5.02 4.93 5.13 4.90 France 1.63 1.75 2.14 2.38 4.41 4.33 4.55 . Germany 1.20 1.14 1.20 1.17 4.18 3.95 4.00 . Italy 2.27 2.41 2.77 2.72 4.38 4.16 4.18 4.31 -0.90 -0.87 -0.40 -0.23 0.75 0.72 0.64 0.59 1.23 1.53 2.56 3.07 4.37 4.25 4.33 . Japan United Kingdom Inflation and Long-Term Interest Rate Differentials Percent Percent 3 3 Canada U.K. Canada 0 0 U.K. Japan Germany Germany -3 -3 Inflation differential = Foreign inflation less U.S. inflation Long-term rate differential = Foreign rate less U.S. rate -6 Japan -6 14610 2000 14976 2001 15341 2002 15706 2003 16071 14610 2000 14976 2001 15341 2002 15706 2003 16071 Research Division Federal Reserve Bank of St. Louis 15 updated through 05/19/03 Monetary Trends Money Stock Bank Adjusted M1 MZM M2 M3 Credit Monetary Base Reserves MSI M2 1998. 1080.016 3707.676 4206.459 5747.977 4333.248 508.942 67.808 241.499 1999. 1101.888 4167.305 4523.633 6248.602 4587.556 557.865 72.360 257.790 2000. 1104.045 4504.688 4798.744 6835.799 5037.235 590.821 68.319 272.405 2001. 1137.041 5214.991 5218.119 7614.441 5355.780 623.788 68.983 296.067 2002. 1191.279 5890.666 5620.554 8224.412 5601.843 678.865 70.129 319.093 2001 1 1100.484 4851.627 5028.958 7270.803 5282.584 604.848 66.577 285.133 . 2 1116.478 5103.197 5156.375 7538.275 5323.925 610.939 65.235 292.627 . 3 1163.269 5323.070 5287.777 7718.573 5373.430 633.771 73.522 300.320 . 4 1167.931 5582.071 5399.365 7930.112 5443.181 645.595 70.596 306.187 2002 1 1184.655 5719.453 5490.160 8044.869 5421.276 663.335 70.297 311.380 . 2 1182.774 5810.252 5545.958 8127.812 5490.827 674.121 69.186 315.070 . 3 1192.044 5953.939 5672.616 8283.599 5663.883 684.786 69.477 321.947 . 4 1205.644 6079.022 5773.484 8441.369 5831.387 693.218 71.557 327.973 2003 1 1227.069 6174.374 5869.873 8561.871 5949.234 709.396 73.063 334.013 2001 Apr 1106.282 5023.156 5125.029 7456.386 5317.004 605.800 63.239 290.700 . May 1117.017 5096.859 5149.815 7535.539 5326.230 613.259 67.119 292.380 . Jun 1126.135 5189.575 5194.282 7622.899 5328.540 613.759 65.346 294.800 . Jul 1138.346 5243.358 5228.639 7660.362 5333.730 619.440 66.654 296.830 . Aug 1149.702 5277.079 5262.000 7669.345 5355.717 627.455 66.379 299.080 . Sep 1201.758 5448.773 5372.691 7826.012 5430.844 654.419 87.534 305.050 . Oct 1164.475 5507.546 5358.520 7860.421 5426.103 644.250 72.956 304.050 . Nov 1165.870 5581.293 5398.998 7934.569 5458.293 644.417 69.378 306.220 . Dec 1173.448 5657.374 5440.578 7995.347 5445.147 648.117 69.455 308.290 2002 Jan 1179.706 5678.119 5464.352 8006.534 5418.916 655.869 70.666 309.800 . Feb 1186.123 5732.647 5502.677 8057.823 5426.384 667.217 71.245 312.010 . Mar 1188.136 5747.592 5503.450 8070.251 5418.528 666.918 68.980 312.330 . Apr 1173.682 5747.375 5491.486 8073.064 5442.539 667.691 68.480 312.260 . May 1184.393 5818.670 5557.324 8137.026 5492.631 676.061 70.546 315.590 . Jun 1190.248 5864.711 5589.065 8173.347 5537.311 678.610 68.531 317.360 . Jul 1197.364 5915.230 5637.898 8222.881 5590.027 682.348 68.943 319.780 . Aug 1186.289 5959.936 5676.871 8292.697 5672.347 684.570 69.021 322.140 . Sep 1192.479 5986.650 5703.079 8335.220 5729.275 687.439 70.468 323.920 . Oct 1203.617 5991.172 5742.422 8342.273 5759.430 690.454 70.817 326.180 . Nov 1202.763 6100.193 5781.383 8462.290 5838.182 693.675 71.461 328.380 . Dec 1210.553 6145.702 5796.646 8519.543 5896.549 695.526 72.392 329.360 2003 Jan 1212.654 6144.671 5827.356 8517.529 5889.423 701.446 73.007 331.510 . Feb 1232.642 6185.920 5883.525 8572.814 5964.145 713.733 74.057 334.770 . Mar 1235.911 6192.532 5898.739 8595.270 5994.135 713.008 72.126 335.760 . Apr 1236.119 6199.596 5921.166 8600.303 6026.182 713.721 71.855 337.590 *All values are given in billions of dollars. Research Division 16 Federal Reserve Bank of St. Louis updated through 05/06/03 Monetary Trends Federal Discount Primary Prime 3-mo Funds Rate Credit Rate Rate CDs Treasury Yields 3-mo 3-yr Corporate 10-yr Aaa Bonds S&L Aaa Bonds Conventional Mortgage 1998. 5.35 4.92 . 8.35 5.47 4.91 5.14 5.26 6.53 4.93 6.94 1999. 4.97 4.62 . 7.99 5.33 4.78 5.49 5.64 7.04 5.28 7.43 2000. 6.24 5.73 . 9.23 6.46 6.00 6.22 6.03 7.62 5.58 8.06 2001. 3.89 3.41 . 6.92 3.69 3.47 4.08 5.02 7.08 4.99 6.97 2002. 1.67 1.17 . 4.68 1.73 1.63 3.10 4.61 6.49 4.87 6.54 2001 1 5.59 5.11 . 8.62 5.26 4.95 4.64 5.05 7.08 5.03 7.01 . 2 4.33 3.83 . 7.34 4.10 3.75 4.43 5.27 7.22 5.11 7.13 . 3 3.50 3.06 . 6.57 3.34 3.24 3.93 4.98 7.11 4.87 6.97 . 4 2.13 1.64 . 5.16 2.06 1.94 3.33 4.77 6.92 4.97 6.78 2002 1 1.73 1.25 . 4.75 1.82 1.76 3.75 5.08 6.62 5.02 6.97 . 2 1.75 1.25 . 4.75 1.83 1.75 3.77 5.10 6.71 5.01 6.81 . 3 1.74 1.25 . 4.75 1.76 1.67 2.62 4.26 6.35 4.72 6.29 . 4 1.44 0.94 . 4.45 1.49 1.36 2.27 4.01 6.28 4.71 6.08 2003 1 1.25 . 2.25 4.25 1.26 1.18 2.07 3.92 6.00 4.60 5.83 2001 Apr 4.80 4.28 . 7.80 4.53 3.97 4.42 5.14 7.20 5.14 7.08 . May 4.21 3.73 . 7.24 4.02 3.70 4.51 5.39 7.29 5.15 7.15 . Jun 3.97 3.47 . 6.98 3.74 3.57 4.35 5.28 7.18 5.03 7.16 . Jul 3.77 3.25 . 6.75 3.66 3.59 4.31 5.24 7.13 4.79 7.13 . Aug 3.65 3.16 . 6.67 3.48 3.44 4.04 4.97 7.02 4.89 6.95 . Sep 3.07 2.77 . 6.28 2.87 2.69 3.45 4.73 7.17 4.93 6.82 . Oct 2.49 2.02 . 5.53 2.31 2.20 3.14 4.57 7.03 4.89 6.62 . Nov 2.09 1.58 . 5.10 2.03 1.91 3.22 4.65 6.97 4.85 6.66 . Dec 1.82 1.33 . 4.84 1.83 1.72 3.62 5.09 6.77 5.18 7.07 2002 Jan 1.73 1.25 . 4.75 1.74 1.68 3.56 5.04 6.55 5.05 7.00 . Feb 1.74 1.25 . 4.75 1.82 1.76 3.55 4.91 6.51 4.93 6.89 . Mar 1.73 1.25 . 4.75 1.91 1.83 4.14 5.28 6.81 5.09 7.01 . Apr 1.75 1.25 . 4.75 1.87 1.75 4.01 5.21 6.76 5.09 6.99 . May 1.75 1.25 . 4.75 1.82 1.76 3.80 5.16 6.75 5.03 6.81 . Jun 1.75 1.25 . 4.75 1.81 1.73 3.49 4.93 6.63 4.92 6.65 . Jul 1.73 1.25 . 4.75 1.79 1.71 3.01 4.65 6.53 4.81 6.49 . Aug 1.74 1.25 . 4.75 1.73 1.65 2.52 4.26 6.37 4.78 6.29 . Sep 1.75 1.25 . 4.75 1.76 1.66 2.32 3.87 6.15 4.58 6.09 . Oct 1.75 1.25 . 4.75 1.73 1.61 2.25 3.94 6.32 4.66 6.11 . Nov 1.34 0.83 . 4.35 1.39 1.25 2.32 4.05 6.31 4.77 6.07 . Dec 1.24 0.75 . 4.25 1.34 1.21 2.23 4.03 6.21 4.70 6.05 2003 Jan 1.24 . . 4.25 1.29 1.19 2.18 4.05 6.17 4.72 5.92 . Feb 1.26 . 2.25 4.25 1.27 1.19 2.05 3.90 5.95 4.57 5.84 . Mar 1.25 . 2.25 4.25 1.23 1.15 1.98 3.81 5.89 4.51 5.75 . Apr 1.26 . 2.25 4.25 1.24 1.15 2.06 3.96 5.74 4.60 5.81 *All values are given as a percent at an annual rate. Research Division Federal Reserve Bank of St. Louis 17 updated through 05/19/03 Monetary Trends M1 MZM M2 M3 Percent change at an annual rate 1998. 1.00 11.67 7.30 10.36 1999. 2.03 12.40 7.54 8.71 2000. 0.20 8.10 6.08 9.40 2001. 2.99 15.77 8.74 11.39 2002. 4.77 12.96 7.71 8.01 2001 1 2.66 18.59 10.64 13.23 . 2 5.81 20.74 10.13 14.71 . 3 16.76 17.23 10.19 9.57 . 4 1.60 19.46 8.44 10.96 2002 1 5.73 9.84 6.73 5.79 . 2 -0.64 6.35 4.07 4.12 . 3 3.13 9.89 9.14 7.67 . 4 4.56 8.40 7.11 7.62 2003 1 7.11 6.27 6.68 5.71 19.07 2001 Apr -1.82 19.55 10.81 . May 11.64 17.61 5.80 12.74 . Jun 9.80 21.83 10.36 13.91 . Jul 13.01 12.44 7.94 5.90 . Aug 11.97 7.72 7.66 1.41 . Sep 54.33 39.04 25.24 24.51 . Oct -37.23 12.94 -3.17 5.28 . Nov 1.44 16.07 9.06 11.32 . Dec 7.80 16.36 9.24 9.19 2002 Jan 6.40 4.40 5.24 1.68 . Feb 6.53 11.52 8.42 7.69 . Mar 2.04 3.13 0.17 1.85 . Apr -14.60 -0.05 -2.61 0.42 . May 10.95 14.89 14.39 9.51 . Jun 5.93 9.50 6.85 5.36 . Jul 7.17 10.34 10.48 7.27 . Aug -11.10 9.07 8.30 10.19 . Sep 6.26 5.38 5.54 6.15 . Oct 11.21 0.91 8.28 1.02 . Nov -0.85 21.84 8.14 17.26 . Dec 7.77 8.95 3.17 8.12 -0.28 2003 Jan 2.08 -0.20 6.36 . Feb 19.78 8.06 11.57 7.79 . Mar 3.18 1.28 3.10 3.14 . Apr 0.20 1.37 4.56 0.70 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: 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). 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 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). 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 research.stlouisfed.org/aggreg/newbase.html. 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; additional data are available 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 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: MZM, or “Money, Zero Maturity,” includes the zero maturity, or immediately available, components of M3. MZM equals M2 minus smalldenomination 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 Anderson and Rasche (2001) and research.stlouisfed.org/aggreg/swdata.html. For analytical purposes, Research Division Federal Reserve Bank of St. Louis MZM largely replaces M1. The 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 shows constant maturity yields calculated by the U.S. Treasury Department for securities with 3 months and 1, 2, 3, 5, 7, and 10 years to maturity. Daily data and descriptions are available at research.stlouisfed.org/ fred/data/wkly.html. See also Federal Reserve Bulletin, table 1.35. The 30-year constant maturity series was discontinued by the Treasury Department 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. 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 (FOMC) 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 consumer price index for all urban consumers. Real Interest Rates are ex post measures, equal to nominal rates minus CPI inflation. 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 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 fouryear 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 19 Monetary Trends 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 research.stlouisfed.org/aggreg/swdata.html. Bureau of Economic Analysis GDP. 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), Chicago Board of Trade Federal funds futures contract. 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 each 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 Bonds are yields on the most recently issued inflation-indexed securities of 10- and 30-year original maturities. Inflation-Indexed Treasury Yield Spreads equal, for 10- and 30-year maturities, the difference between the yields on the most recently issued inflation-indexed securities and the unadjusted bond yields of similar maturity. Inflation-Indexed 30-Year Government Bonds shows the yield of an inflation-indexed bond that is scheduled to mature in approximately (but not greater than) 30 years. The current bond for Canada has a maturity date of 12/01/2031, the current U.K. bond has a maturity date of 7/22/2030, and the current U.S. bond has a maturity date of 4/15/2032. Inflation-Indexed 10-Year Government Bonds shows the yield of an inflation-indexed bond that is scheduled to mature in approximately (but not greater than) 10 years. The current U.K. bond has a maturity date of 8/23/2011 and the current U.S. bond has a maturity date of 7/15/2012. 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. Bureau of Labor Statistics CPI. 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 & Poors Inc. 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. 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, 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, 1994-1999,” Federal Reserve Bank of St. Louis Review, January/February, pp. 51-72. ____ , 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. Page 13: Real Gross Domestic Product is GDP as measured in chained 1996 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 1996 dollars. McCallum, Bennett T. (1988). “Robustness Properties of a Monetary Policy Rule,” Carnegie-Rochester Conference Series on Public Policy, vol. 29, pp. 173-204. Page 14: Investment Securities are all securities held by commercial banks in both investment and trading accounts. Motley, Brian (1988). “Should M2 Be Redefined?” Federal Reserve Bank of San Francisco Economic Review, Winter, pp. 33-51. Page 17: Treasury Yields are Treasury constant maturities as reported in the Board of Governors of the Federal Reserve System’s H.15 release. Nelson, Charles R. and Andrew F. Siegel (1987). “Parsimonious Modeling of Yield Curves,” Journal of Business, October, pp. 473-89. Sources 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. Bank of Canada Canadian inflation-linked bond yields. ____(1993). “Specification and Analysis of a Monetary Policy Rule for Japan,” Bank of Japan Monetary and Economic Studies, November, pp. 1-45. Bank of England U.K. inflation-linked bond yields. Sharpe, William F. (1997). Macro-Investment Analysis, on-line textbook available at www.stanford.edu/~wfsharpe/mia/mia.htm. 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. Shiller, Robert (1990). “The Term Structure of Interest Rates,” Handbook of Monetary Economics, vol. 1, B. Friedman and F. Hahn, eds., pp. 627-722. 20 Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” CarnegieRochester Conference Series on Public Policy, vol. 39, pp. 195-214. Note: Articles from this Bank’s Review are available on the Internet at research.stlouisfed.org/publications/review/. Research Division Federal Reserve Bank of St. Louis