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MonetaryTrends October 2010 Deflation and the Fisher Equation I 1990s, the ex post real federal funds rate was 2.18 percent rving Fisher (1867-1947), one of America’s greatest and, in the 1980s, it was a whopping 4.61 percent. monetary economists, is famous for many reasons. With the federal funds rate near zero since December One of the most important is the Fisher equation, 2008 and expected to remain there for the next year or two, which states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. This is a the Fisher equation has important implications for the expected inflation rate. If the real economy is currently rebounding to statement about equilibrium in the market for bonds, not a sustainable growth trend, the real interest rate will rise and about the factors that determine these two components. the only outcomes possible will be either a higher nominal Depending on which market rate is used, the expected federal funds rate or a negative expected inflation rate. real return will include a premium for various sources of The current consensus is that the Federal Open Market risk. For most of post-WWII U.S. history, estimates of Committee cannot raise interest rates because the unemploythis risk premium in the federal funds market have been ment rate is so high. The unemployment rate, however, is a small relative to estimates of the risk-free real interest poor guide for setting the policy rate during a recovery rate and the expected inflation rate, so they are ignored because unemployment lags growth in gross domestic prodin this essay. uct. The high unemployment rate will persist even as the The chart shows the Fed’s policy rate—the federal economy recovers and real interest rates rise. So, according funds rate—and the consumer price index (CPI) inflation to Irving Fisher, one reason to worry about deflation is that trend. The trend is measured as a 25-month centered movthe federal funds rate is expected to be held near zero as the ing average. We use a 25-month window to filter out the economy grows out of this recession. noise or temporary deviations associated with temporary shocks and measurement error. The Blue Chip Consensus —William T. Gavin forecast is used as the inflation rate for the next 12 months to make the calculation current; that is, the last value in the chart is the monthly average of actual inflation from July 2009 through July 2010 and the Blue Chip Consensus monthly forecasts of CPI inflation CPI Inflation and the Federal Funds Rate through July 2011 (shown at an annual rate). Percent Annual Rate Since January 2000, the average federal funds 7 rate has been 2.80 percent and the average CPI 6 inflation rate has been 2.50 percent. The ex post Federal Funds Rate real federal funds rate has been 0.30 percent. The 5 low real interest rate is associated with a decade 4 bracketed by two recessions and, consequently, relatively low economic growth. Looking back to 3 the 1990s when real growth was surprisingly rapid, 2 the average federal funds rate was 5.15 percent 1 while the inflation rate averaged 2.97 percent. Yet, CPI Inflation Trend these values were low compared with the 1980s— 0 the average federal funds rate was 9.97 percent and –1 the average inflation rate was 5.36 percent. In the 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 09/21/10 Monetary Trends M2 and MZM Treasury Yield Curve Billions of dollars Percent 9900 5 MZM Week Ending Friday: 09/18/09 08/20/10 09/17/10 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 3 300 200 20y Week Ending Friday: 09/18/09 08/20/10 09/17/10 2 100 0 1 -100 -200 0 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: 09/18/09 08/20/10 09/17/10 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 09/21/10 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 09/21/10 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 09/21/10 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 09/21/10 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 09/21/10 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 09/21/10 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 09/21/10 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 09/21/10 Monetary Trends Implied One-Year Forward Rates Rates on 3-Month Eurodollar Futures Percent 6 Percent, daily data 0.56 Week Ending: 09/18/09 08/20/10 09/17/10 5 4 0.49 Nov 2010 3 0.42 | | | 2 Oct 2010 0.35 1 0 2y 5y 3y 7y 10y Sep 2010 0.28 07/19 Rates on Selected Federal Funds Futures Contracts 07/26 08/02 08/09 08/16 08/23 08/30 09/06 09/13 09/20 Rates on Federal Funds Futures on Selected Dates Percent, daily data Percent 0.22 0.22 07/16/2010 Nov 2010 0.20 0.20 09/17/2010 Sep 2010 0.18 0.18 08/13/2010 Oct 2010 0.16 0.16 07/19 07/26 08/02 08/09 08/16 08/23 08/30 09/06 09/13 Sep 09/20 Oct Nov Jan Dec Feb Contract Month Inflation-Indexed Treasury Securities Inflation-Indexed Treasury Yield Spreads Weekly data Weekly data Percent Percent 4.00 4.00 2.67 1.67 1.33 -0.67 20 0.00 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 09/21/10 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 09/21/10 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 09/21/10 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 09/21/10 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 2009Q3 2009Q4 2010Q1 Long-Term Government Bond Rates 2010Q2 May10 Percent Jun10 Jul10 Aug10 United States -1.60 1.46 2.42 1.77 3.42 3.20 3.01 2.70 Canada -0.87 0.79 1.61 1.40 3.45 3.28 3.20 2.98 France -0.42 0.36 1.32 1.61 3.08 3.07 . . Germany -0.25 0.44 0.81 1.06 2.73 2.54 2.62 2.35 3.80 Italy Japan United Kingdom 0.12 0.65 1.29 1.41 3.99 4.10 4.03 -2.31 -2.03 -1.12 -0.93 1.26 1.08 1.08 . 1.46 2.09 3.26 3.44 3.77 3.57 3.48 3.20 * 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 08/17/10 Monetary Trends Money Stock Bank Adjusted M1 MZM M2 M3* Credit Monetary Base Reserves 2005. 1371.536 6709.684 6524.832 9786.477 7015.642 806.623 96.555 343.539 2006. 1374.163 7000.882 6868.752 10270.74 7698.030 835.036 94.909 . 2007. 1372.079 7635.008 7303.199 . 8463.337 850.544 94.159 . 2008. 1432.775 8707.694 7823.088 . 9123.482 1009.767 232.170 . 2009. 1634.804 9537.118 8436.940 . 9193.247 1796.572 944.793 . MSI M2** 2008 1 1384.590 8384.246 7618.254 . 9001.155 856.263 96.115 . . 2 1392.557 8664.175 7733.424 . 9004.581 859.333 94.378 . . 3 1423.718 8773.061 7829.293 . 9072.266 892.762 117.838 . . 4 1530.237 9009.295 8111.382 . 9415.925 1430.712 620.349 . 2009 1 1578.272 9413.546 8363.350 . 9330.060 1663.022 820.691 . . 2 1621.078 9550.893 8420.406 . 9285.616 1763.719 917.109 . . 3 1653.103 9585.002 8442.804 . 9144.193 1747.153 895.408 . . 4 1686.765 9599.029 8521.200 . 9013.121 2012.393 1145.965 . 2010 1 1702.912 9497.220 8521.489 . 8922.226 2089.181 1216.986 . . 2 1710.363 9387.769 8563.048 . 9199.405 2034.267 1158.289 . 2008 Jul 1413.845 8768.068 7801.390 . 9027.693 870.707 97.012 . . Aug 1398.847 8752.714 7789.624 . 9028.065 871.469 96.673 . . Sep 1458.462 8798.402 7896.864 . 9161.040 936.110 159.830 . . Oct 1471.733 8845.564 8012.064 . 9498.832 1142.155 347.607 . . Nov 1516.921 8971.958 8064.557 . 9389.721 1480.742 674.073 . . Dec 1602.056 9210.362 8257.526 . 9359.223 1669.239 839.367 . 2009 Jan 1583.474 9342.150 8318.930 . 9334.898 1730.414 870.183 . . Feb 1573.982 9412.811 8358.887 . 9350.707 1590.201 758.628 . . Mar 1577.360 9485.677 8412.234 . 9304.574 1668.452 833.261 . . Apr 1608.534 9472.155 8366.764 . 9261.193 1787.758 949.349 . . May 1608.536 9579.490 8439.162 . 9313.723 1799.320 946.195 . . Jun 1646.163 9601.034 8455.293 . 9281.932 1704.080 855.782 . . Jul 1649.971 9599.330 8445.331 . 9202.625 1693.690 841.454 . . Aug 1648.483 9560.317 8421.966 . 9159.403 1728.096 879.570 . . Sep 1660.854 9595.358 8461.114 . 9070.552 1819.673 965.200 . . Oct 1676.188 9598.647 8493.987 . 8984.716 1975.377 1122.191 . . Nov 1687.511 9605.793 8525.219 . 9043.586 2044.519 1182.207 . . Dec 1696.597 9592.648 8544.394 . 9011.060 2017.284 1133.497 . 2010 Jan 1680.757 9522.816 8488.470 . 8942.069 2010.112 1105.430 . . Feb 1714.827 9528.544 8549.933 . 8883.944 2150.910 1296.143 . . Mar 1713.151 9440.299 8526.064 . 8940.664 2106.522 1249.385 . . Apr 1701.691 9349.126 8498.054 . 9255.630 2044.296 1178.953 . . May 1706.769 9398.968 8579.979 . 9194.380 2034.542 1149.699 . . Jun 1722.630 9415.214 8611.111 . 9148.204 2023.962 1146.215 . . Jul 1718.488 9433.686 8610.356 . 9211.634 2015.148 1131.017 . 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 09/08/10 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 0.13 0.19 0.61 0.75 3.25 3.25 0.21 0.42 0.11 0.15 1.47 1.38 3.72 3.49 5.29 5.04 3.93 3.83 5.00 4.91 2008 Aug . Sep 2.00 1.81 2.25 2.25 5.00 5.00 2.79 3.59 1.75 1.15 2.70 2.32 3.89 3.69 5.64 5.65 4.44 4.61 6.48 6.04 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 0.18 0.19 0.75 0.75 3.25 3.25 0.41 0.32 0.16 0.16 0.98 0.78 3.01 2.70 4.72 4.49 3.69 3.44 4.56 4.43 Note: All values are given as a percent at an annual rate. Research Division Federal Reserve Bank of St. Louis 17 updated through 08/17/10 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 5.27 6.32 7.12 7.85 5.97 4.95 . . . 2008 . . . 1 2 3 4 2.63 2.30 8.95 29.93 15.73 13.35 5.03 10.77 7.90 6.05 4.96 14.41 . . . . 2009 . . . 1 2 3 4 12.56 10.85 7.90 8.15 17.95 5.84 1.43 0.59 12.43 2.73 1.06 3.71 . . . . 2010 . 1 2 3.83 1.75 -4.24 -4.61 0.01 1.95 . . 2008 Jul . Aug . Sep 14.61 -12.73 51.14 7.74 -2.10 6.26 8.03 -1.81 16.52 . . . Oct Nov Dec 10.92 36.84 67.35 6.43 17.15 31.89 17.51 7.86 28.71 . . . 2009 Jan . Feb . Mar -13.92 -7.19 2.58 17.17 9.08 9.29 8.92 5.76 7.66 . . . . . . . . . Apr May Jun 23.72 0.00 28.07 -1.71 13.60 2.70 -6.49 10.38 2.29 . . . . . . Jul Aug Sep 2.78 -1.08 9.01 -0.21 -4.88 4.40 -1.41 -3.32 5.58 . . . . . . Oct Nov Dec 11.08 8.11 6.46 0.41 0.89 -1.64 4.66 4.41 2.70 . . . 2010 Jan . Feb . Mar -11.20 24.32 -1.17 -8.74 0.72 -11.11 -7.85 8.69 -3.35 . . . . . . Apr May Jun -8.03 3.58 11.15 -11.59 6.40 2.07 -3.94 11.57 4.35 . . . . Jul -2.89 2.35 -0.11 . *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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