Full text of Monetary Trends : September 2000
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September 2000 MonetaryTrends Spring of Disconnect Across Stock Markets? Rates of return on broad stock market indices, such as the composite New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations System (NASDAQ), are generally highly correlated with one another. Although the two indices are comprised of different stocks, both of their rates of return are influenced by macroeconomic shocks and a common underlying rate of discounting future profits. In the spring of 2000, however, the NASDAQ and NYSE seemed to disconnect, in that their movements were substantially less correlated than usual. Mico Loretan and William English suggest that changes across time in the measured correlation between financial rates of return can reflect changes in the volatility of one asset relative to another.1 If NASDAQ returns, for example, experience an idiosyncratic increase in volatility that is not shared by NYSE returns, then the correlation between the returns of the two indices will be lower than average during the period of high volatility. On the other hand, if events cause the volatilities of NASDAQ and NYSE returns to increase in tandem, then the 1 correlation will be higher than average. In the spring of 2000, NASDAQ returns experienced 0.75 unprecedented volatility and NYSE returns did not. Of special concern to investors during that period was uncertainty about the future prof0.5 itability of internet stocks, which make up a relatively larger share of the NASDAQ index 0.25 than of the NYSE. This idiosyncratic increase in the volatility of NASDAQ returns might help us understand why we observed low cor0 relations between NASDAQ and NYSE returns Sep-98 last spring. The attached chart shows 100-day rolling sample correlations between NYSE and NASDAQ returns (dark line) and how the sample correlation would be expected to vary from its long-run average due solely to changes in the volatilities of returns, holding the underlying correlation structure constant (gray line). The volatility-implied degree of correlation proves to be an imperfect indicator during periods of relatively high and stable correlation, but tracks the sample correlations accurately when the sample correlations are far below normal. Thus, sharp drops in sample correlations do not necessarily represent a fundamental break in the correlation structure between the two stock markets. The link between the idiosyncratic volatility of NASDAQ returns and the sample correlations between NASDAQ and NYSE returns suggests a gradual return to normal correlations as NASDAQ volatility subsides from the high levels reached this spring. —Michael Dueker 1Mico Loretan and William B. English, “Special Feature: Evaluating changes in correlations during periods of high market volatility,” BIS Quarterly Review, June 2000, pp. 29-36. Sample Correlation (Rolling 100-day Window) Correlation Implied by Sample Variances (Measured in Rolling 100-Day Window) Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Views expressed do not necessarily reflect official positions of the Federal Reserve System. Jun-00 TableofContents Page 3 Monetary and Financial Indicators at a Glance 4-5 Monetary Aggregates and Their Components 6 Monetary Aggregates: Monthly Growth 7 Reserves Markets and Short-Term Credit Flows 8 Measures of Expected Inflation 9 Interest Rates 10 Policy-Based Inflation Indicators 11 Implied Forward Rates, Futures Contracts, and Inflation-Protected Securities 12-13 Velocity, Gross Domestic Product, and M2 14 Bank Credit 15 Stock Market Index, and Foreign Inflation and Interest Rates 16-18 Reference Tables 18-20 Definitions, Notes, and Sources Conventions used in this publication: 1. Unless otherwise indicated, data are monthly. 2. Shaded areas indicate recessions, as dated by the National Bureau of Economic Research. 3. The percent change at an annual rate is the simple, not compounded, monthly percent change multiplied by 12. For example, using consecutive months, the percent change at an annual rate in x between month t-1 and the current month t is: [(x t / x t-1) - 1] x 1200. Note that this differs from National Economic Trends. In that publication monthly percent changes are compounded and expressed as annual growth rates. 4. The percent change from year ago refers to the percent change from the same period in the previous year. For example, the percent change from year ago in x between month t-12 and the current month t is: [(x t / x t-12) - 1] x 100. We welcome your comments addressed to: Editor, Monetary Trends Research Division Federal Reserve Bank of St. Louis P.O. Box 442 St. Louis, MO 63166 or to: webmaster@stls.frb.org Monetary Trends is published monthly by the Research Division of the Federal Reserve Bank of St. Louis. Single-copy subscriptions are available free of charge by writing Public Affairs Office, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis, MO 63166-0442 or by calling (314) 444-8808 or (314) 444-8809. Subscription forms can also be filled out electronically at http://www.stls.frb.org/research/order/pubform.html. For more information on data, please call (314) 444-8590. Information in this publication is also included in the Federal Reserve Economic Data (FRED) electronic bulletin board at (314) 621-1824 or internet World Wide Web server at http://www.stls.frb.org/fred. The entire publication is also available electronically at http://www.stls.frb.org/publications/mt. MonetaryTrends 08/14/00 M2 and MZM Reserve Market Rates Billions of $ 5000 5% 4750 1% Percent 6.75 Effective Federal Funds Rate Expected Federal Funds Rate 6.50 5% 6.25 1% 6.00 4500 M2 4250 5.75 4000 5.50 5.25 3750 5.00 3500 MZM Discount Rate 4.75 3250 4.50 3000 4.25 1997 1998 1999 2000 1997 1998 1999 2000 Dotted lines indicate the FOMC target ranges. Adjusted Monetary Base Treasury Yield Curve Percent change at an annual rate 50 Percent 7.75 Week ending: 08/13/99 7.25 07/14/00 08/11/00 40 30 6.75 20 6.25 10 5.75 0 5.25 -10 4.75 -20 -30 4.25 1997 1998 1999 2000 3m1y 2y 3y 5y 7y 10y 20y 30y Total Bank Credit Interest Rates Percent change at an annual rate 50 Jun 00 Jul 00 Federal Funds Rate 6.27 6.53 6.54 Discount Rate 5.71 6.00 6.00 Prime Rate 9.24 9.50 9.50 Conventional Mortgage Rate 8.52 8.29 May 00 40 . 30 Treasury Yields Treasury Yields: 20 10 0 -10 1997 1998 1999 . . 8.15 . . . 3-month constant maturity 5.99 5.86 6.14 6-month constant maturity 6.39 6.24 6.27 1-year constant maturity 6.33 6.17 6.08 3-year constant maturity 6.77 6.43 6.28 5-year constant maturity 6.69 6.30 6.18 10-year constant maturity 6.44 6.10 6.05 30-year constant maturity 6.15 5.93 5.85 2000 Federal Reserve Bank of St. Louis MonetaryTrends 08/14/00 MZM and M1 Percent change from year ago 20 15 MZM 10 5 0 M1 -5 -10 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 88 89 90 91 92 93 94 95 96 97 98 99 00 89 90 91 92 93 94 95 96 97 98 99 00 M2 Percent change from year ago 15 10 5 0 -5 83 84 85 Dotted lines indicate the FOMC target ranges. M3 Percent change from year ago 15 10 5 0 -5 83 84 85 86 87 Dotted lines indicate the FOMC target ranges. Monetary Services Index - M2 Percent change from year ago 15 10 5 0 -5 83 84 85 86 87 88 Federal Reserve Bank of St. Louis MonetaryTrends 08/14/00 Adjusted Monetary Base Percent change from year ago 20 15 10 5 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 Domestic Nonfinancial Debt Currency Held by the Nonbank Public Percent change from year ago Percent change from year ago 15 15 10 Total 10 5 0 5 Federal -5 -10 0 1993 1994 1995 1996 1997 1998 1999 2000 1997 1998 1999 Time Deposits Checkable and Savings Deposits Percent change from year ago Percent change from year ago 25 20 20 15 15 10 Large Denomination 10 2000 Savings 5 5 0 0 -5 Small Denomination -5 Checkable -10 -10 -15 1997 1998 1999 2000 Money Market Mutual Fund Shares 1997 1998 1999 2000 Repurchase Agreements and Eurodollars Percent change from year ago Billions of dollars 40 Billions of dollars 350 300 35 30 Institutional funds 300 250 Repos (left) 25 250 20 200 Retail funds 15 200 150 10 Eurodollars (right) 5 150 1997 1998 1999 2000 100 1997 Federal Reserve Bank of St. Louis 1998 1999 2000 MonetaryTrends 08/14/00 M1 Percent change at an annual rate 40 30 20 10 0 -10 -20 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 87 88 89 90 91 92 93 94 95 96 97 98 99 00 87 88 89 90 91 92 93 94 95 96 97 98 99 00 87 88 89 90 91 92 93 94 95 96 97 98 99 00 MZM Percent change at an annual rate 40 30 20 10 0 -10 -20 83 84 85 86 M2 Percent change at an annual rate 40 30 20 10 0 -10 83 84 85 86 M3 Percent change at an annual rate 40 30 20 10 0 -10 83 84 85 86 Federal Reserve Bank of St. Louis MonetaryTrends 08/14/00 Adjusted and Required Reserves Billions of $ 100 80 Adjusted 60 40 Required 20 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 Total Borrowings, nsa Excess Reserves plus RCB Contracts Billions of $ Billions of $ 0.8 12 0.6 10 0.4 8 0.2 6 0.0 4 1993 1994 1995 1996 1997 1998 1999 2000 1993 1994 1995 1996 1997 1998 1999 Nonfinancial Commercial Paper Percent change from year ago 60 40 20 0 -20 -40 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 Consumer Credit Percent change from year ago 20 15 10 5 0 -5 -10 83 84 85 Federal Reserve Bank of St. Louis 2000 MonetaryTrends 08/14/00 Inflation and Inflation Expectations Percent 10 8 Federal Reserve Bank of Philadelphia 6 CPI inflation Humphrey-Hawkins CPI inflation range 4 2 University of Michigan 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 The shaded region shows the Humphrey-Hawkins CPI inflation range. Beginning in January 2000, the Humphrey-Hawkins inflation range was reported using the PCE price index and therefore is not shown on this graph . See page 19 for information. Treasury Security Yield Spreads Yield to maturity 6 30 year - 3 month 4 2 0 -2 3 year - 3 month 30 year - 3 year 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 98 99 00 Real Interest Rates Percent, Real rate = Nominal rate less CPI inflation 8 6 1-year Treasury Yield 4 2 Federal Funds Rate 0 -2 83 84 85 86 87 88 89 90 91 92 93 94 95 Federal Reserve Bank of St. Louis 96 97 01 MonetaryTrends 08/14/00 Short Term Interest Rates Percent 14 12 90-day Commercial Paper 10 8 Prime Rate 6 3-month Treasury Yield 4 2 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 97 98 99 00 Long Term Interest Rates Percent 16 14 Conventional mortgage 12 10 8 Corporate Aaa 6 4 30-year Treasury Yield 83 84 85 86 87 88 89 90 91 92 Long Term Interest Rates 93 95 96 Short Term Interest Rates Percent Percent 9 9 8 8 Corporate Baa 7 7 30-year Treasury Yield 6 5 94 6 5 10-year Treasury Yield 4 90-day Commercial Paper 3-month Treasury Yield 4 1997 1998 1999 2000 1997 1998 1999 2000 FOMC Expected Federal Funds Rate and Discount Rate Percent 12 10 Federal Funds Rate 8 6 Discount Rate 4 2 83 84 85 86 87 88 89 90 91 92 93 94 95 Federal Reserve Bank of St. Louis 96 97 98 99 00 MonetaryTrends 08/14/00 Federal Funds Rate and Inflation Targets Percent 12 4% 3% 2% 1% 0% Target Inflation Rates 9 Actual 6 3 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Calculated federal funds rate is based on Taylor’s rule. See notes on page 19. Actual and Potential Real GDP PCE Inflation Billions of chain-weighted 1996 dollars Percent change from year ago 9500 6 9000 5 8500 4 8000 3 7500 Potential 2 7000 Actual 6500 1 6000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Monetary Base Growth* and Inflation Targets Percent 12 Actual (2-year moving average) 9 6 3 0% 1% 2% 3% 4% Target Inflation Rates 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 *Modified for the effects of sweeps programs on reserve demand. Calculated base growth is based on McCallum’s rule. See notes on page 19. Monetary Base Velocity Growth Real Output Growth Percent Percent 4 8 Actual 0 -4 4 4-year moving average 10-year moving average 0 Actual -8 -4 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Federal Reserve Bank of St. Louis MonetaryTrends 08/14/00 Implied One-Year Forward Rates Rates on 3-Month Eurodollar Futures Percent 9 8 7 Percent, daily data 7.3 Week ending: 08/13/99 07/14/00 08/11/00 Oct 2000 7.2 7.1 Sep 2000 7.0 6 6.9 5 Aug 2000 6.8 4 6.7 3 2y3y 5y 7y 10y 20y 30y 6.6 06/12 06/19 06/26 07/03 07/10 07/17 07/24 07/31 08/07 08/14 Rates on Selected Fed Funds Futures Contracts Implied Yields on Fed Funds Futures Percent, daily data Percent 6.9 6.9 Oct 2000 6.8 6.8 6.7 6.7 Sep 2000 6.6 06/16/2000 07/14/2000 6.6 Aug 2000 6.5 08/11/2000 6.5 6.4 6.4 06/12 06/19 06/26 07/03 07/10 07/17 07/24 07/31 08/07 08/14 Aug Sep Oct Nov Dec Jan Inflation-Protected Treasury Yields Inflation-Protected Treasury Yield Spreads Percent, weekly data Percent, weekly data 4.5 4 10-year 3 4.0 30-year 2 5-year 30-year 3.5 5-year 1 10-year 3.0 0 1997 1998 1999 2000 1997 1998 1999 2000 Inflation-Indexed 30-Year Bonds Inflation-Indexed 10-Year Bonds Percent, weekly data Percent, weekly data 6 6 5 5 Canada 4 US 4 UK 3 US 3 2 UK 2 1 1 1996 1997 1998 1999 2000 1996 Federal Reserve Bank of St. Louis 1997 1998 1999 2000 MonetaryTrends 08/14/00 MZM Velocity and Opportunity Cost Velocity = Nominal GDP / MZM Opportunity Cost = 3 month T-bill rate less MZM own rate 10.0 3.5 3.0 7.5 Velocity 2.5 5.0 2.0 2.5 Opportunity Cost 1.5 0.0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 M2 Velocity and Opportunity Cost Velocity = Nominal GDP / M2 Opportunity Cost = Treasury rate less M2 own rate 2.25 10.0 Velocity 2.00 7.5 1.75 5.0 Opportunity Cost (5-yr T-bond) 1.50 2.5 Opportunity Cost (3-mo T-bill) 1.25 0.0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 M2, MZM and Nominal GDP Billions of $ 10000 Nominal GDP 8000 6000 M2 4000 MZM 2000 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 97 98 99 00 Interest Rates Percent 20 15 10 5-yr bond M2 own 5 3-mo bill MZM own 0 83 84 85 86 87 88 89 90 91 92 93 94 95 Federal Reserve Bank of St. Louis 96 MonetaryTrends 08/14/00 Gross Domestic Product Percent change from year ago 20 15 10 5 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 89 90 91 92 93 94 95 96 97 98 99 00 Real Gross Domestic Product Percent change from year ago 15 10 5 0 -5 83 84 85 86 87 88 Gross Domestic Product Price Index Percent change from year ago 20 15 10 5 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 M2 Percent change from year ago 20 15 10 5 0 83 84 85 Dashed lines indicate 10-year moving averages Federal Reserve Bank of St. Louis MonetaryTrends 08/14/00 Bank Credit Percent change from year ago 20 15 10 5 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1998 1999 2000 1997 1998 1999 2000 1997 1998 1999 2000 Investment Securities in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1991 1992 1993 1994 1995 1996 1997 Total Loans and Leases in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1991 1992 1993 1994 1995 1996 Commercial and Industrial Loans at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 1991 1992 1993 1994 1995 1996 Federal Reserve Bank of St. Louis MonetaryTrends 08/14/00 Standard and Poor’s 500 1600 48 1400 42 1200 36 1000 30 Price/earnings ratio (right) 800 24 600 18 400 12 Composite Index (left) 200 6 0 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 Inflation and Long-Term Interest Rates Trend in Consumer Price Inflation Rates Recent Long-Term Government Bond Rates Percent change from year ago 1999Q3 1999Q4 2000Q1 2000Q2 Percent Apr00 May00 Jun00 Jul00 United States 2.26 2.56 3.15 3.25 5.99 6.44 6.10 6.05 Canada 2.18 2.36 2.65 2.45 5.90 6.10 5.89 5.84 France 0.53 1.00 1.50 1.49 5.84 5.92 5.94 . Germany 0.64 0.96 1.78 1.62 5.22 5.38 5.19 5.27 Italy 1.72 2.06 2.36 2.50 5.51 5.71 5.52 5.60 Japan 0.07 -1.04 -0.65 -0.72 1.73 1.72 1.69 1.73 United Kingdom 1.17 1.47 2.30 3.13 5.30 5.40 5.20 5.20 Inflation and Long-Term Interest Rates Differentials Percent 3 Inflation differential = Foreign inflation less U.S. Inflation Long-term rate differential = Foreign rate less U.S. rate Percent 3 U.K. Canada Germany Canada 0 0 U.K. Germany Japan -3 -3 -6 -6 Japan 1997 1998 1999 2000 1997 Federal Reserve Bank of St. Louis 1998 1999 2000 MonetaryTrends 08/14/00 Money Stock M1 Bank MZM M2 M3 Credit Monetary Base Reserves MSI M2 1995 . 1143.038 2906.094 3575.435 4500.289 3500.564 443.499 76.838 210.451 1996 . 1106.430 3096.352 3747.400 4796.868 3683.584 455.572 73.401 217.848 1997 . 1069.929 3318.532 3931.853 5179.493 3951.699 478.708 68.873 227.067 1998 . 1080.846 3705.324 4221.724 5711.132 4323.399 508.942 66.925 242.237 1999 . 1102.371 4158.377 4539.239 6210.470 4580.632 557.864 71.674 258.556 1998 1 1076.722 3524.589 4098.635 5499.270 4185.142 498.320 67.645 235.943 . 2 1078.669 3637.500 4176.265 5638.731 4247.795 502.020 66.044 239.950 . 3 1076.068 3746.138 4249.273 5763.404 4348.164 511.546 66.905 243.733 . 4 1091.926 3913.071 4362.724 5943.121 4512.493 523.881 67.105 249.320 1999 1 1097.202 4033.398 4444.411 6064.720 4510.959 536.335 67.691 253.370 . 2 1102.976 4127.445 4511.462 6155.761 4526.561 545.912 66.526 257.003 . 3 1098.082 4199.240 4571.141 6232.001 4591.176 557.968 68.111 260.280 . 4 1111.222 4273.426 4629.940 6389.398 4693.833 591.241 84.366 263.570 2000 1 1112.518 4358.590 4699.593 6557.441 4829.366 593.096 71.405 267.157 . 2 1108.292 4424.744 4770.498 6686.496 4971.414 585.972 65.826 270.860 1998 Jul 1076.867 3700.743 4219.007 5703.630 4295.259 507.618 66.307 242.270 . Aug 1073.126 3739.477 4243.024 5762.236 4350.743 511.031 67.371 243.440 . Sep 1078.211 3798.193 4285.789 5824.347 4398.490 515.990 67.036 245.490 . Oct 1084.673 3860.023 4327.205 5887.674 4484.142 520.806 67.058 247.530 . Nov 1093.735 3915.678 4364.176 5944.992 4517.211 524.379 67.182 249.420 . Dec 1097.371 3963.511 4396.791 5996.698 4536.127 526.458 67.074 251.010 1999 Jan 1095.975 3998.522 4422.168 6028.560 4524.279 531.761 68.517 252.260 . Feb 1094.273 4039.664 4447.589 6077.897 4514.475 538.190 68.067 253.460 . Mar 1101.359 4062.007 4463.477 6087.704 4494.122 539.053 66.488 254.390 . Apr 1107.196 4099.645 4490.418 6123.751 4503.956 539.608 64.109 255.900 . May 1101.658 4129.287 4513.045 6156.254 4515.973 548.331 68.423 257.070 . Jun 1100.074 4153.404 4530.922 6187.277 4559.754 549.796 67.045 258.040 . Jul 1099.464 4177.427 4552.829 6211.009 4563.598 553.060 66.880 259.220 . Aug 1098.683 4200.873 4570.461 6229.093 4592.926 556.711 67.248 260.240 . Sep 1096.099 4219.420 4590.134 6255.902 4617.004 564.134 70.206 261.380 . Oct 1101.271 4242.473 4607.091 6306.524 4632.694 572.989 73.419 262.320 . Nov 1109.451 4270.167 4627.284 6384.709 4686.564 588.668 83.916 263.420 . Dec 1122.945 4307.638 4655.445 6476.961 4762.242 612.067 95.764 264.970 2000 Jan 1119.409 4340.935 4679.276 6521.216 4790.015 604.790 80.626 266.190 . Feb 1105.815 4340.647 4691.261 6538.977 4827.008 589.978 68.224 266.760 . Mar 1112.331 4394.189 4728.241 6612.131 4871.075 584.519 65.364 268.520 . Apr 1116.646 4425.002 4768.879 6658.659 4918.901 583.045 64.326 270.670 . May 1105.495 4421.088 4765.170 6681.515 4984.354 587.855 67.565 270.510 . Jun 1102.735 4428.143 4777.445 6719.315 5010.986 587.015 65.587 271.400 . Jul 1103.542 4459.871 4790.301 6767.921 5044.995 587.613 65.636 . *All values are given in billions of dollars Federal Reserve Bank of St. Louis MonetaryTrends 08/14/00 Federal Discount Prime Funds Rate Rate 1995 . 5.84 5.21 8.83 1996 . 5.30 5.02 8.27 1997 . 5.46 5.00 1998 . 5.35 1999 . 3-mo CDs Treasury Yields Corporate S&L Conventional 3 mo 3 yr 30 yr Aaa Bonds Aaa Bonds Mortgage 5.92 5.66 6.26 6.88 7.59 5.80 7.95 5.39 5.15 5.99 6.70 7.37 5.52 7.80 8.44 5.62 5.20 6.10 6.61 7.26 5.32 7.60 4.92 8.35 5.47 4.91 5.14 5.58 6.53 4.93 6.94 4.97 4.62 7.99 5.33 4.78 5.49 5.87 7.04 5.28 7.43 1998 1 5.52 5.00 8.50 5.55 5.19 5.46 5.88 6.67 4.94 7.05 . 2 5.50 5.00 8.50 5.59 5.11 5.57 5.85 6.64 5.00 7.09 . 3 5.53 5.00 8.50 5.53 4.96 5.11 5.47 6.49 4.95 6.87 . 4 4.86 4.66 7.92 5.20 4.37 4.41 5.11 6.33 4.82 6.76 1999 1 4.73 4.50 7.75 4.90 4.53 4.87 5.37 6.42 4.87 6.88 . 2 4.75 4.50 7.75 4.98 4.59 5.35 5.80 6.93 5.05 7.20 . 3 5.09 4.60 8.10 5.38 4.79 5.71 6.04 7.33 5.42 7.80 . 4 5.31 4.87 8.37 6.06 5.20 6.00 6.25 7.49 5.79 7.83 2000 1 5.68 5.19 8.69 6.03 5.70 6.56 6.30 7.71 5.82 8.26 . 2 6.27 5.74 9.25 6.57 5.89 6.52 5.98 7.77 5.72 8.32 1998 Jul 5.54 5.00 8.50 5.59 5.09 5.47 5.68 6.55 5.01 6.95 . Aug 5.55 5.00 8.50 5.58 5.04 5.24 5.54 6.52 5.01 6.92 . Sep 5.51 5.00 8.49 5.41 4.74 4.62 5.20 6.40 4.84 6.72 . Oct 5.07 4.86 8.12 5.21 4.07 4.18 5.01 6.37 4.76 6.71 . Nov 4.83 4.63 7.89 5.24 4.53 4.57 5.25 6.41 4.87 6.87 . Dec 4.68 4.50 7.75 5.14 4.50 4.48 5.06 6.22 4.83 6.72 1999 Jan 4.63 4.50 7.75 4.89 4.45 4.61 5.16 6.24 4.85 6.79 . Feb 4.76 4.50 7.75 4.90 4.56 4.90 5.37 6.40 4.80 6.81 . Mar 4.81 4.50 7.75 4.91 4.57 5.11 5.58 6.62 4.96 7.04 . Apr 4.74 4.50 7.75 4.88 4.41 5.03 5.55 6.64 4.89 6.92 . May 4.74 4.50 7.75 4.92 4.63 5.33 5.81 6.93 5.05 7.15 . Jun 4.76 4.50 7.75 5.13 4.72 5.70 6.04 7.23 5.22 7.55 . Jul 4.99 4.50 8.00 5.24 4.69 5.62 5.98 7.19 5.24 7.63 . Aug 5.07 4.56 8.06 5.41 4.87 5.77 6.07 7.40 5.47 7.94 . Sep 5.22 4.75 8.25 5.50 4.82 5.75 6.07 7.39 5.56 7.82 . Oct 5.20 4.75 8.25 6.13 5.02 5.94 6.26 7.55 5.78 7.85 . Nov 5.42 4.86 8.37 6.00 5.23 5.92 6.15 7.36 5.77 7.74 . Dec 5.30 5.00 8.50 6.05 5.36 6.14 6.35 7.55 5.82 7.91 2000 Jan 5.45 5.00 8.50 5.95 5.50 6.49 6.63 7.78 5.91 8.21 . Feb 5.73 5.24 8.73 6.01 5.73 6.65 6.23 7.68 5.88 8.33 . Mar 5.85 5.34 8.83 6.14 5.86 6.53 6.05 7.68 5.68 8.24 . Apr 6.02 5.50 9.00 6.28 5.82 6.36 5.85 7.64 5.60 8.15 . May 6.27 5.71 9.24 6.71 5.99 6.77 6.15 7.99 5.87 8.52 . Jun 6.53 6.00 9.50 6.73 5.86 6.43 5.93 7.67 5.69 8.29 . Jul 6.54 6.00 9.50 6.67 6.14 6.28 5.85 7.65 5.53 8.15 *All values are given as a percent at an annual rate Federal Reserve Bank of St. Louis MonetaryTrends M1 MZM 08/14/00 M2 M3 Percent change from previous period 1995 . -0.21 -0.46 2.06 4.56 1996 . -3.20 6.55 4.81 6.59 1997 . -3.30 7.18 4.92 7.98 1998 . 1.02 11.66 7.37 10.26 1999 . 1.99 12.23 7.52 8.74 1998 1 0.73 2.84 1.93 2.65 . 2 0.18 3.20 1.89 2.54 . 3 -0.24 2.99 1.75 2.21 . 4 1.47 4.46 2.67 3.12 1999 1 0.48 3.08 1.87 2.05 . 2 0.53 2.33 1.51 1.50 . 3 -0.44 1.74 1.32 1.24 . 4 1.20 1.77 1.29 2.53 2000 1 0.12 1.99 1.50 2.63 . 2 -0.38 1.52 1.51 1.97 1998 Jul -0.09 0.75 0.44 0.37 . Aug -0.35 1.05 0.57 1.03 . Sep 0.47 1.57 1.01 1.08 . Oct 0.60 1.63 0.97 1.09 . Nov 0.84 1.44 0.85 0.97 . Dec 0.33 1.22 0.75 0.87 1999 Jan -0.13 0.88 0.58 0.53 . Feb -0.16 1.03 0.57 0.82 . Mar 0.65 0.55 0.36 0.16 . Apr 0.53 0.93 0.60 0.59 . May -0.50 0.72 0.50 0.53 . Jun -0.14 0.58 0.40 0.50 . Jul -0.06 0.58 0.48 0.38 . Aug -0.07 0.56 0.39 0.29 . Sep -0.24 0.44 0.43 0.43 . Oct 0.47 0.55 0.37 0.81 . Nov 0.74 0.65 0.44 1.24 . Dec 1.22 0.88 0.61 1.44 2000 Jan -0.31 0.77 0.51 0.68 . Feb -1.21 -0.01 0.26 0.27 . Mar 0.59 1.23 0.79 1.12 . Apr 0.39 0.70 0.86 0.70 . May -1.00 -0.09 -0.08 0.34 . Jun -0.25 0.16 0.26 0.57 . Jul 0.07 0.72 0.27 0.72 Federal Reserve Bank of St. Louis Definitions Notes M1: the sum of: currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions, except demand deposits due to the Treasury and depository institutions, minus cash items in process of collection and Federal Reserve float. Page 3: MZM, or “Money, Zero Maturity” includes the zero maturity, or immediately available, components of M3. MZM equals M2 minus small denomination time deposits, plus institutional money market mutual funds (that is, the money market mutual funds included in M3 but excluded from M2). Readers are cautioned that since early 1994 the level and growth of M1 have been depressed by retail sweep programs that reclassify transactions deposits (demand deposits and other checkable deposits) as savings deposits overnight, thereby reducing banks’ required reserves; see http://www.stls.frb.org/research/swdata.html. For analytical purposes, MZM largely replaces M1. The Discount Rate and Expected Federal Funds Rate shown in the chart Reserve Market Rates, are plotted as of the date of the change, while the Effective Federal Funds Rate is plotted as of the end of the month. Interest rates in the table are monthly averages from the Board of Governors H.15 Statistical Release. Treasury Yield Curve shows constant maturity yields calculated by the U.S. Treasury Department for securities with 3 months and 1, 2, 3, 5, 7,10, 20 and 30 years to maturity. Daily data and a description are available at http://www.stls.frb.org/fred/data/wkly.html. See also Federal Reserve Bulletin, table 1.35. MZM: M2 minus small denomination time deposits, plus institutional money market mutual funds. The label MZM was coined by William Poole (1991) for this aggregate, proposed earlier by Motley (1988). Due to distortions caused by regulatory changes, the largest of which the introduction of money market accounts, data for MZM begin March 1983 in this publication. M2: M1 plus: savings deposits (including money market deposit accounts) and small denomination (less than $100,000) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments of less than $50,000), net of retirement accounts. M3: M2 plus: large denomination ($100,000 or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank U.S. addresses held at foreign offices of U.S. banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $50,000 or more). Bank Credit: all loans, leases and securities held by commercial banks. Domestic Nonfinancial Debt: total credit market liabilities of the U.S. Treasury, federally sponsored agencies, state and local governments, households, and firms except depository institutions and money market mutual funds. Adjusted Monetary Base: the sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. This series is a spliced chain index; see Anderson and Rasche (1996a,b). Adjusted Reserves: the sum of vault cash and Federal Reserve Bank deposits held by depository institutions, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. This series, a spliced chain index, is numerically larger than the Board of Governors’ measure which excludes vault cash not used to satisfy statutory reserve requirements and Federal Reserve Bank deposits used to satisfy required clearing balance contracts; see Anderson and Rasche (1996a) and http://www.stls.frb.org/research/newbase.html. Monetary Services Index: an index which measures the flow of monetary services received by households and firms from their holdings of liquid assets; see Anderson, Jones and Nesmith (1997). Indexes are shown for the assets included in M2; additional data are available at http://www.stls.frb.org/research/msi/index.html. Note: M1, M2, M3, Bank Credit and Domestic Nonfinancial Debt are constructed and published by the Board of Governors of the Federal Reserve System. For details, see Federal Reserve Bulletin, tables 1.21 and 1.26. MZM, Adjusted Monetary Base, Adjusted Reserves and Monetary Services Index are constructed and published by the Research Division of the Federal Reserve Bank of St. Louis. Page 5: Total Checkable Deposits is the sum of demand and other checkable deposits. Total Savings Deposits is the sum of money market deposit accounts (MMDA), and passbook and statement savings. Time Deposits have a minimum initial maturity of 7 days. Large Time Deposits are deposits of $100,000 or more. Retail and Institutional Money Market Mutual Funds are as included in M2 and the non-M2 component of M3, respectively. Page 7: Excess Reserves plus RCB (Required Clearing Balance) Contracts equals the amount of deposits at Federal Reserve Banks held by depository institutions but not applied to satisfy statutory reserve requirements. (This measure excludes the vault cash held by depository institutions that is not applied to satisfy statutory reserve requirements.) Consumer credit includes most short- and intermediate-term credit extended to individuals. See Federal Reserve Bulletin, table 1.55. Page 8: Inflation expectations measures include the quarterly Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, the monthly University of Michigan Survey Research Center’s Surveys of Consumers, and the annual Federal Open Market Committee range as reported to the Congress in the February Humphrey-Hawkins Act testimony each year. Beginning February 2000, the FOMC began using the Personal Consumption Expenditures (PCE) price index to report its inflation range, and therefore is not shown on this graph. CPI Inflation is the percentage change from a year ago in the CPI for all urban consumers. Real Interest Rates are ex post measures, equal to nominal rates minus CPI inflation. Page 9: FOMC Expected Federal Funds Rate is the level (or midpoint of the range, if applicable) of the federal funds rate that the staff of the Federal Open Market Committee expected to be consistent with the desired degree of pressure on bank reserve positions. Page 10: Federal Funds Rate and Inflation Targets shows the observed federal funds rate, quarterly, and the level of the funds rate implied by applying Taylor’s (1993) equation ft* = 2.5 + πt-1 + (πt-1 - π*)/2 + 100 × (yt-1 - yt-1P)/2 to five alternative target inflation rates π* = 0, 1, 2, 3, 4 percent, where ft* is the implied federal funds rate, πt-1 is the previous period’s inflation rate (PCE), yt-1 is the log of the previous period’s level of real GDP, and yt-1P is the log of an estimate of the previous period’s level of potential output. Potential real output is as estimated by the Congressional Budget Office. Monetary Base Growth and Inflation Targets shows the quarterly growth of the adjusted monetary base (modified to include an estimate of the effect of sweep programs) implied by applying McCallum’s (1988, 1993) equation ∆MBt* = π* + (10-year moving average growth of real GDP) – (4-year moving average of base velocity growth) to five alternative target inflation rates π* = 0, 1, 2, 3, 4 percent, where ∆MBt* is the implied growth rate of the adjusted monetary base. The 10-year moving average growth of real GDP for a quarter “t” is calculated as the average quarterly growth during the previous 40 quarters, at an annual rate, by the formula ((yt - yt-40)/40) × 4 × 100, where yt is the log of real GDP. The four-year moving average of base velocity growth is calculated similarly. To adjust the monetary base for the effect of retail-deposit sweep programs, we add to the monetary base an amount equal to 10 percent of the total amount swept, as estimated by the Federal Reserve Board staff. These estimates are imprecise, at best. Sweep program data are available at http://www.stls.frb.org/research/swdata.html. Page 11: Implied One–Year Forward Rates are calculated by this Bank from Treasury constant maturity yields. Yields to maturity, R(m), for securities with m = 1,..., 30 years to maturity are obtained by linear interpolation between reported yields. These yields are smoothed by fitting the regression suggested by Nelson and Siegel (1987) -m/50 R(m) = a0 + (a1 + a2)(1 – e )/(m/50) – a2 × e -m/50 , and forward rates are calculated from these smoothed yields using equation (a) in Table 13.1 of Shiller (1990) f(m) = [D(m)R(m) – D(m-1)] / [D(m) – D(m-1)] –R(m) × m ) / R(m). These where duration is approximated as D(m) = (1 – e rates are linear approximations to the true instantaneous forward rates; see Shiller. For a discussion of the use of forward rates as indicators of inflation expectations, see Sharpe (1997). Rates on 3-Month Eurodollar Futures and Rates on Selected Fed Funds Futures Contracts each trace through time the yield on three specific contracts. Implied Yields on Fed Funds Futures displays a single day’s snapshot of yields for contracts expiring in the months shown on the horizontal axis. Inflation-Protected Treasury Yield Spreads equal, for 5, 10, and 30 year maturities, the difference between the Treasury constant maturity yield and the yield on the most recently issued inflation-protected security. Inflation-Indexed Bonds for Canada are the 31-year bond with a maturity date of 12/01/2026; for the U.K., the 37.5-year bond with a maturity date of 07/17/2024 and the 12.1-year bond with a maturity date of 10/21/2004; and, for the U.S., the 30-year bond with a maturity date of 04/15/2028 and the 10-year bond with a maturity date of 01/15/2007. Page 12: Velocity (for MZM and M2) equals the ratio of GDP, measured in current dollars, to the level of the monetary aggregate. MZM and M2 Own Rates are weighted averages of the rates received by households and firms on the assets included in the aggregates. Two alternative opportunity costs are shown, one relative to the 3-month Treasury constant-maturity yield, the other to the 5-year constantmaturity yield. Page 13: Real Gross Domestic Product is GDP as measured in chained 1992 dollars. The Gross Domestic Product Price Index is the implicit price deflator for GDP, which is defined by the Bureau of Economic Analysis, U.S. Department of Commerce, as the ratio of GDP measured in current dollars to GDP measured in chained 1992 dollars. Page 14: Investment Securities are all securities held by commercial banks in both investment and trading accounts. Sources Bank of Canada Canadian inflation-linked bond yields. Bank of England U.K. inflation-linked bond yields. Board of Governors of the Federal Reserve System Monetary aggregates and components, nonfinancial debt: H.6 release; bank credit and components: H.8 release; consumer credit: G.19 release; required reserves, excess reserves, clearing balance contracts and discount window borrowing: H.4.1 and H.3 releases; interest rates: H.15 and G.13 releases; nonfinancial commercial paper: Board of Governors web site; M2 and MZM own rates. Bureau of Economic Analysis Gross domestic product. Bureau of Labor Statistics Consumer price index. Federal Reserve Bank of Philadelphia Survey of Professional Forecasters inflation expectations. Federal Reserve Bank of St. Louis Adjusted monetary base and adjusted total reserves, monetary services index, one-year forward rates. Organization for Economic Cooperation and Development International interest and inflation rates. University of Michigan Survey Research Center Median expected price change. Congressional Budget Office Potential real GDP. Dow Jones and Co. (Wall Street Journal) Federal funds futures contracts, Eurodollar futures. Standard and Poors Inc. Stock price-earnings ratio, stock price composite index. U.S. Department of the Treasury U.S. inflation-protected security yields. References Anderson, Richard G. and Robert H. Rasche (1996a). “A Revised Measure of the St. Louis Adjusted Monetary Base,” Federal Reserve Bank of St. Louis Review, March/April 1996, pp. 3 - 13. and (1996b). “Measuring the Adjusted Monetary Base in an Era of Financial Change,” Federal Reserve Bank of St. Louis Review, November/December 1996, pp. 3 - 37. , Barry E. Jones and Travis D. Nesmith (1997). “Special Report: The Monetary Services Indexes Project of the Federal Reserve Bank of St. Louis,” Federal Reserve Bank of St. Louis Review, January/ February 1997, pp. 31 - 82. McCallum, Bennett T. (1988). “Robustness Properties of a Monetary Policy Rule,” Carnegie-Rochester Conference Series on Public Policy, vol. 29, pp. 173 - 204. (1993). “Specification and Analysis of a Monetary Policy Rule for Japan,” Bank of Japan Monetary and Economic Studies, November, pp. 1 - 45. Motley, Brian (1988). “Should M2 Be Redefined?” Federal Reserve Bank of San Francisco Economic Review, Winter, pp. 33 - 51. Nelson, Charles R. and Andrew F. Siegel (1987). “Parsimonious Modeling of Yield Curves,” Journal of Business, October, pp. 473 - 89. Poole, William (1991). Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November 6, 1991. Government Printing Office, Serial No. 102-82. Sharpe, William F. (1997). Macro-Investment Analysis, on-line textbook available at www.stanford.edu/~wfsharpe/mia/mia.htm. Shiller, Robert (1990). “The Term Structure of Interest Rates,” Handbook of Monetary Economics, vol. 1, B. Friedman and F. Hahn, eds., pp. 627 - 722. Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, vol. 39, pp. 195 - 214. Note: Articles from this Bank’s Review are available on the Internet at www.stls.frb.org/research/reviewdat.html.