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MonetaryTrends September 2011 Searching for the Financial Accelerator: How Credit Affects the Business Cycle A 1952:Q1 1953:Q3 1955:Q1 1956:Q3 1958:Q1 1959:Q3 1961:Q1 1962:Q3 1964:Q1 1965:Q3 1967:Q1 1968:Q3 1970:Q1 1971:Q3 1973:Q1 1974:Q3 1976:Q1 1977:Q3 1979:Q1 1980:Q3 1982:Q1 1983:Q3 1985:Q1 1986:Q3 1988:Q1 1989:Q3 1991:Q1 1992:Q3 1994:Q1 1995:Q3 1997:Q1 1998:Q3 2000:Q1 2001:Q3 2003:Q1 2004:Q3 2006:Q1 2007:Q3 2009:Q1 2010:Q3 Furthermore, they did so while simultaneously accumulating highly liquid prominent view in economics is that malfunctioning credit assets (currency, savings, and checkable deposits). The combination of markets “are not simply passive reflections of a declining real these two observations is puzzling if firms are purportedly starving for economy, but are in themselves a major factor depressing credit but cannot obtain it. economic activity.”1 This view has greatly influenced monetary policy. The implementation of aggressive policies supporting credit markets A clear example is the recent “Great Recession,” when financial markets is one possible explanation why credit did not drop more than in previous became volatile and illiquid and the viability of some of the world’s crises. It is also possible that shocks affect small and large firms asymmetleading financial institutions was seriously in doubt. Federal Reserve rically and that aggregate data, as used here, mask such effects. Finally, the policymakers responded aggressively by lowering interest rates to recent crisis may have affected very short-term credit instruments that are near zero, implementing lending facilities, and instituting multiple not necessarily captured in the quarterly frequency data available from the rounds of quantitative easing, parts of which were aimed directly at Fed’s Flow of Funds Accounts statistical release. supporting the functioning of the financial system. Analyses linking the performance of financial markets to aggregate —Adrian Peralta-Alva economic activity typically have a financial accelerator mechanism at 1 Bernanke, Ben S.; Gertler, Mark and Gilchrist, Simon. “The Financial Accelerator their core. Fed Chairman Ben Bernanke eloquently summarizes the workings of this mechanism in a recent speech.2 Here, I interpret movein a Quantitative Business Cycle Framework,” in John B. Taylor and Michael ments in business credit demand and liquid asset holdings in terms of Woodford, eds., Handbook of Macroeconomics. Chap. 21. Amsterdam: Elsevier, this theory. pp. 1341-393. The key links between the workings of the financial system and 2 Bernanke, Ben S. “The Financial Accelerator and the Credit Channel.” Presented real economic activity are easily understood. Entrepreneurs may develop at the Federal Reserve Bank of Atlanta Conference, Credit Channel of Monetary profitable projects and firms may find it profitable to expand or invest Policy in the Twenty-First Century, June 15, 2007; www.federalreserve.gov/ more. Both actions typically require tapping credit markets to obtain newsevents/speech/Bernanke20070615a.htm. required resources. Access to credit, however, is limited by the presence of asymmetric information and principal-agent problems, which are natural in credit relations. Financial institutions appropriately monitor borrowers to help overcome these Net Changes in Credit Market Instruments and Liquid Assets frictions. (nonfinancial business sector) Because of the costs incurred by lenders to monitor borrowers, external financing is generally costlier than Net Changes in Credit Market Instruments/Income Before Taxes internal financing. This external finance premium is 1.0 negatively related to the borrower’s net worth and overall financial position. This relationship creates a mech0.8 anism of financial acceleration. Any shock that affects the financial position of the firm affects its borrowing capacity, which in turn affects its profitability and, 0.6 ultimately, its financial position. Shocks that otherwise would be short-lived may be easily amplified through 0.4 this channel. Two natural implications of the accelerator mecha0.2 nism are that (i) crises with high financial distress should be associated with relatively larger declines in credit and 0 (ii) a decline in credit should be associated with a decline in holdings of liquid assets. The chart shows the ratio of net changes in credit market instruments (including –0.2 bank loans, commercial paper, and corporate bonds) to income before taxes for the U.S. nonfinancial business –0.4 sector. Credit declined quite substantially during the Great Recession, as the theory predicts, given the distressed financial markets. However, the net change in credit does not seem particularly different from the two NBER Recession Liquid Assets Credit Market Instruments previous recessions, which were milder and not obviNOTE: NBER, National Bureau of Economic Research. ously driven by financial distress. Of note, not only did SOURCE: Federal Reserve Statistical Release Z.1: Flow of Funds Accounts of the United States (www.federalreserve.gov/releases/z1/). credit decline from 2008 to 2009, but firms also started repaying their debts (the change is negative). 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 08/16/11 Monetary Trends M2 and MZM Treasury Yield Curve Billions of dollars Percent 3.9 11000 Week Ending Friday: 08/13/10 07/15/11 08/12/11 10000 MZM 2.9 9000 M2 1.9 8000 7000 0.9 2008 2009 2010 5y 2011 7y 10y Adjusted Monetary Base Real Treasury Yield Curve Percent change at an annual rate Percent 400 2 300 200 20y Week Ending Friday: 08/13/10 07/15/11 08/12/11 1 100 0 0 -100 -200 -1 2008 2009 2010 5y 2011 Reserve Market Rates 7y 10y 20y Inflation-Indexed Treasury Yield Spreads Percent Percent 5 2.7 Effective Federal Funds Rate Intended Federal Funds Rate 4 Week Ending Friday: 08/13/10 07/15/11 08/12/11 2.2 3 2 1.7 Primary Credit Rate 1 0 1.2 2008 2009 2010 2011 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 08/16/11 Monetary Trends M1 Percent change from year ago 21 14 7 0 -7 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 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 94 95 96 M2 Percent change from year ago 12 9 6 3 0 -3 94 95 96 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 08/16/11 Monetary Trends Adjusted Monetary Base Percent change from year ago 120 100 80 60 40 20 0 -20 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 11 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 2004 2005 2006 2007 2008 2009 2010 2011 2008 2009 Small Denomination Time Deposits Checkable Deposits Percent change from year ago Percent change from year ago 2010 2011 2010 2011 2010 2011 30 25.0 12.5 20 0.0 10 -12.5 -25.0 0 2008 2009 2010 2011 2008 2009 Money Market Mutual Fund Shares Savings Deposits Percent change from year ago Percent change from year ago 60 20 15 30 10 Institutional Funds 0 5 Retail Funds -30 0 2008 2009 2010 2011 2008 2009 Research Division Federal Reserve Bank of St. Louis 5 updated through 08/16/11 Monetary Trends Adjusted and Required Reserves Billions of dollars 1800 1200 600 Required | | | Adjusted 0 94 95 96 97 98 99 00 01 02 Total Borrowings, nsa 03 04 05 06 07 08 09 10 11 Excess Reserves plus RCB Contracts Billions of dollars Billions of dollars 450 2000 1500 300 1000 150 500 0 0 2004 2005 2006 2007 2008 2009 2010 2011 00 01 2004 2005 2006 2007 2008 2009 2010 2011 04 05 06 07 08 09 10 11 07 08 09 10 11 * Data exclude term auction credit Nonfinancial Commercial Paper Percent change from year ago 60 30 0 -30 -60 94 95 96 97 98 99 02 03 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 94 95 96 97 98 99 00 01 02 03 04 05 06 Research Division 6 Federal Reserve Bank of St. Louis updated through 08/16/11 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 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans Percentage 90 60 30 0 -30 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Net Percentage of Domestic Banks Tightening Standards for Residential Mortgage Loans Percentage 80 60 40 20 0 -20 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 08 09 10 11 Net Percentage of Domestic Banks Tightening Standards for Consumer Loans Percentage 90 60 Credit Card Loans 30 0 Other Consumer Loans -30 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Research Division Federal Reserve Bank of St. Louis 7 updated through 08/02/11 Monetary Trends CPI Inflation and 1-Year-Ahead CPI Inflation Expectations Percent 6 CPI Inflation 5 Humphrey-Hawkins CPI Inflation Range 4 3 2 | | | | | | | | | | | | 1 University of Michigan 0 -1 -2 Federal Reserve Bank of Philadelphia 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 11 10 12 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 4 4 10-Year less 3-Month T-Bill 1-Year Treasury Yield 2 2 0 10-Year less 3-Year Note 0 3-Year less 3-Month T-Bill -2 Federal Funds Rate -2 02 03 04 05 06 07 08 09 10 11 -4 02 03 04 05 06 07 08 09 10 11 Research Division 8 Federal Reserve Bank of St. Louis updated through 08/02/11 Monetary Trends Short-Term Interest Rates Percent 12 10 8 90-Day Commercial Paper 6 Prime Rate 4 3-Month Treasury Yield 2 0 -2 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 08 09 10 11 Long-Term Interest Rates Percent 10 6 4 Conventional Mortgage || | | | | | 8 Corporate Aaa 10-Year Treasury Yield 2 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Long-Term Interest Rates Short-Term Interest Rates Percent Percent 10 4 8 3 Corporate Baa 90-Day Commercial Paper 6 2 3-Month Treasury Yield 10-Year Treasury Yield 4 1 2 | | | 0 2008 2009 2010 2011 2008 2009 2010 2011 FOMC Intended Federal Funds Rate, Discount Rate, and Primary Credit Rate Percent 8 Intended Federal Funds Rate 6 Discount Rate 4 Primary Credit Rate 2 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Research Division Federal Reserve Bank of St. Louis 9 updated through 08/16/11 Monetary Trends Federal Funds Rate and Inflation Targets Percent 10 4% 3% 2% 1% 0% Target Inflation Rates 5 Actual 0 -5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 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 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 See notes section for further explanation. Monetary Base Growth and Inflation Targets Percent 30 Target Inflation Rates 15 0% 1% 2% 3% 4% Actual 0 -15 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Calculated base growth is based on McCallum's rule. Actual base growth is percent change from the previous quarter. Stars represent actual values for 2008:Q4, 2009:Q1, 2009:Q4, 2011:Q1, 2011:Q2 and are 188.02 percent, 60.74 percent, 56.52 percent, 45.94 percent, and 58.74 percent, respectively. Components of McCallum's Rule Monetary Base Velocity Growth Real Output Growth Percent Percent 15 10 Recursive Average 10-Year Moving Average | 0 | || 5 -15 -30 0 -45 1-Year Moving Average -60 Quarter to Quarter Growth Rate -5 -75 -10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Research Division 10 Federal Reserve Bank of St. Louis updated through 08/16/11 Monetary Trends Implied One-Year Forward Rates Rates on 3-Month Eurodollar Futures Percent 7 Percent, daily data 0.48 Week Ending: 08/13/10 07/15/11 08/12/11 6 5 0.43 4 Oct 2011 0.38 3 Sep 2011 2 0.33 1 Aug 2011 0 2y 5y 3y 7y 10y 0.28 06/13 Rates on Selected Federal Funds Futures Contracts 06/20 06/27 07/04 07/11 07/18 07/25 08/01 08/08 08/15 Rates on Federal Funds Futures on Selected Dates Percent, daily data Percent 0.16 0.16 06/17/2011 0.14 Oct 2011 07/15/2011 0.13 Sep 2011 0.12 0.10 0.10 08/12/2011 Aug 2011 0.08 0.07 06/13 06/20 06/27 07/04 07/11 07/18 07/25 08/01 08/08 Aug 08/15 Sep Oct Nov Jan Dec Contract Month Inflation-Indexed Treasury Securities Inflation-Indexed Treasury Yield Spreads Weekly data Weekly data Percent Percent 4.00 4.00 1.67 1.67 -0.67 -0.67 20 -3.00 2009 15 10 2010 . 2011 2012 5 Maturity 20 -3.00 2009 15 10 2010 2011 . Note: Yields are inflation-indexed constant maturity U.S. Treasury securities 2012 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 3 4 3 2 2 U.S. U.S. 1 1 0 0 -1 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 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 08/16/11 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 12419 94 12784 95 13149 96 13515 97 13880 98 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 11 18993 Interest Rates Percent 8 6 3-Month T-Bill 4 M2 Own 2 MZM Own 0 94 95 96 97 98 99 00 01 02 03 05 06 07 08 09 10 MZM Velocity and Interest Rate Spread M2 Velocity and Interest Rate Spread Ratio Scale Ratio Scale 3.50 11 2.25 Velocity = Nominal GDP / M2 Velocity = Nominal GDP / MZM 04 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 08/16/11 Monetary Trends Gross Domestic Product Percent change from year ago 10 8 6 4 2 0 -2 -4 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 99 00 01 02 03 04 05 06 07 08 09 10 11 Dashed lines indicate 10-year moving averages. Real Gross Domestic Product Percent change from year ago 6 3 0 -3 -6 94 95 96 97 98 Dashed lines indicate 10-year moving averages. Gross Domestic Product Price Index Percent change from year ago 5 4 3 2 1 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 99 00 01 02 03 04 05 06 07 08 09 10 11 Dashed lines indicate 10-year moving averages. M2 Percent change from year ago 12 9 6 3 0 94 95 96 97 98 Dashed lines indicate 10-year moving averages. Research Division Federal Reserve Bank of St. Louis 13 updated through 08/16/11 Monetary Trends Bank Credit Percent change from year ago 15 10 5 0 -5 -10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2008 2009 2010 2011 2009 2010 2011 Investment Securities in Bank Credit at Commercial Banks Percent change from year ago 20 15 10 5 0 -5 2002 2003 2004 2005 2006 2007 Total Loans and Leases in Bank Credit at Commercial Banks Percent change from year ago 15 10 5 0 -5 -10 -15 2002 2003 2004 2005 2006 2007 2008 Commercial and Industrial Loans at Commercial Banks Percent change from year ago 30 15 0 -15 -30 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Research Division 14 Federal Reserve Bank of St. Louis updated through 08/16/11 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 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Recent Inflation and Long-Term Interest Rates Consumer Price Inflation Rates Percent change from year ago 2010Q3 2010Q4 2011Q1 Long-Term Government Bond Rates 2011Q2 Apr11 Percent May11 Jun11 Jul11 United States 1.22 1.20 2.17 3.33 3.46 3.17 3.00 3.00 Canada 1.83 2.27 2.60 3.36 3.35 3.16 3.00 2.95 France 1.53 1.65 1.81 2.07 3.69 3.49 3.43 . Germany 1.18 1.49 2.08 2.35 3.34 3.06 2.89 2.74 Italy Japan United Kingdom 1.62 1.79 2.34 2.67 4.84 4.76 4.82 . -0.80 0.10 0.03 0.27 1.22 1.12 . . 3.09 3.36 4.13 4.37 3.75 3.49 3.39 . * Copyright , 2011, Organisation for Economic Cooperation and Development, OECD Main Economic Indicators (www.oecd.org). Inflation and Long-Term Interest Rate Differentials Percent Percent 2 4 Canada Germany U.K. Germany 2 0 U.K. Canada 0 -2 -2 Japan Inflation differential = Foreign inflation less U.S. inflation Long-term rate differential = Foreign rate less U.S. rate -4 Japan -4 2008 2009 2010 2011 2008 2009 2010 2011 Research Division Federal Reserve Bank of St. Louis 15 updated through 08/16/11 Monetary Trends Money Stock Bank Adjusted Credit Monetary Base M1 MZM M2 M3* Reserves MSI M2** 2006. 1374.189 7001.848 6866.561 10270.74 7694.074 835.035 94.908 . 2007. 1372.136 7636.260 7299.210 . 8461.299 850.529 94.146 . 2008. 1433.140 8709.498 7818.267 . 9062.465 1010.131 232.536 . 2009. 1636.852 9543.295 8434.306 . 9170.372 1796.544 944.774 . 2010. 1740.808 9533.956 8624.882 . 9141.833 2031.704 1144.131 . 2009 1 1577.914 9402.331 8354.439 . 9282.676 1662.910 820.582 . . 2 1624.149 9586.836 8426.964 . 9255.248 1763.620 917.025 . . 3 1660.872 9605.995 8446.243 . 9136.652 1747.189 895.450 . . 4 1684.474 9578.020 8509.576 . 9006.912 2012.459 1146.039 . 2010 1 1698.897 9475.708 8505.431 . 8922.244 2089.193 1217.050 . . 2 1708.658 9417.419 8560.186 . 9210.437 2034.300 1158.475 . . 3 1747.268 9534.782 8655.011 . 9212.451 2003.663 1117.953 . . 4 1808.411 9707.913 8778.900 . 9222.199 1999.660 1083.047 . 2011 1 1870.223 9797.337 8888.794 . 9162.361 2243.008 1310.581 . . 2 1925.759 10039.92 9031.673 . 9170.455 2597.878 1647.759 . 2009 Jul 1661.505 9638.678 8454.482 . 9200.259 1693.714 841.482 . . Aug 1655.340 9588.082 8430.323 . 9151.857 1728.117 879.597 . . Sep 1665.770 9591.224 8453.924 . 9057.841 1819.736 965.271 . . Oct 1679.853 9584.743 8484.315 . 8975.719 1975.378 1122.203 . . Nov 1679.941 9582.970 8513.822 . 9038.296 2044.688 1182.381 . . Dec 1693.627 9566.347 8530.591 . 9006.722 2017.311 1133.534 . 2010 Jan 1681.135 9482.865 8467.609 . 8940.781 2010.111 1105.468 . . Feb 1703.433 9507.608 8535.307 . 8881.908 2150.926 1296.207 . . Mar 1712.122 9436.651 8513.376 . 8944.043 2106.541 1249.475 . . Apr 1698.965 9399.374 8524.135 . 9262.173 2044.317 1179.157 . . May 1704.092 9415.482 8563.592 . 9208.606 2034.566 1149.889 . . Jun 1722.917 9437.400 8592.831 . 9160.532 2024.018 1146.379 . . Jul 1726.024 9467.029 8608.783 . 9199.941 2015.197 1131.110 . . Aug 1746.429 9532.627 8654.303 . 9227.316 2014.643 1133.740 . . Sep 1769.350 9604.690 8701.947 . 9210.095 1981.149 1089.008 . . Oct 1779.432 9659.486 8742.448 . 9231.310 1998.502 1099.711 . . Nov 1817.343 9715.258 8780.476 . 9228.827 1991.154 1076.436 . . Dec 1828.458 9748.996 8813.777 . 9206.459 2009.323 1072.995 . 2011 Jan 1850.504 9741.745 8838.362 . 9189.682 2057.166 1095.886 . . Feb 1871.679 9791.719 8899.747 . 9151.164 2243.621 1327.482 . . Mar 1888.487 9858.548 8928.272 . 9146.238 2428.238 1508.374 . . Apr 1898.622 9948.833 8963.725 . 9178.868 2531.680 1599.150 . . May 1931.239 10044.69 9019.840 . 9175.699 2590.384 1627.402 . . Jun 1947.416 10126.23 9111.454 . 9156.798 2671.569 1716.724 . . Jul 2006.204 10298.71 9313.437 . 9206.707 2703.615 1738.123 . 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 08/09/11 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 2006. 2007. 2008. 2009. 2010. 4.96 5.02 1.93 0.16 0.17 5.96 5.86 2.39 0.50 0.72 7.96 8.05 5.09 3.25 3.25 5.15 5.27 2.97 0.56 0.31 4.85 4.47 1.39 0.15 0.14 4.77 4.34 2.24 1.43 1.11 4.79 4.63 3.67 3.26 3.21 5.59 5.56 5.63 5.31 4.94 4.15 4.13 4.58 4.27 3.90 6.41 6.34 6.04 5.04 4.69 2009 . . . 1 2 3 4 0.18 0.18 0.16 0.12 0.50 0.50 0.50 0.50 3.25 3.25 3.25 3.25 1.08 0.62 0.30 0.22 0.22 0.17 0.16 0.06 1.27 1.49 1.56 1.39 2.74 3.31 3.52 3.46 5.27 5.51 5.27 5.20 4.64 4.43 4.11 3.91 5.06 5.03 5.16 4.92 2010 . . . 1 2 3 4 0.13 0.19 0.19 0.19 0.61 0.75 0.75 0.75 3.25 3.25 3.25 3.25 0.21 0.42 0.34 0.28 0.11 0.15 0.16 0.14 1.47 1.38 0.83 0.74 3.72 3.49 2.79 2.86 5.29 5.04 4.58 4.86 3.93 3.83 3.58 4.24 5.00 4.91 4.45 4.41 2011 . 1 2 0.16 0.09 0.75 0.75 3.25 3.25 0.28 0.22 0.13 0.05 1.16 0.95 3.46 3.21 5.13 5.04 4.71 4.50 4.85 4.66 2009 Jul . Aug . Sep 0.16 0.16 0.15 0.50 0.50 0.50 3.25 3.25 3.25 0.35 0.30 0.25 0.18 0.17 0.12 1.55 1.65 1.48 3.56 3.59 3.40 5.41 5.26 5.13 4.36 4.17 3.81 5.22 5.19 5.06 Oct Nov Dec 0.12 0.12 0.12 0.50 0.50 0.50 3.25 3.25 3.25 0.24 0.21 0.22 0.07 0.05 0.05 1.46 1.32 1.38 3.39 3.40 3.59 5.15 5.19 5.26 3.85 3.99 3.89 4.95 4.88 4.93 2010 Jan . Feb . Mar 0.11 0.13 0.16 0.50 0.59 0.75 3.25 3.25 3.25 0.20 0.19 0.23 0.06 0.11 0.15 1.49 1.40 1.51 3.73 3.69 3.73 5.26 5.35 5.27 3.96 3.91 3.91 5.03 4.99 4.97 . . . . . . Apr May Jun 0.20 0.20 0.18 0.75 0.75 0.75 3.25 3.25 3.25 0.30 0.45 0.52 0.16 0.16 0.12 1.64 1.32 1.17 3.85 3.42 3.20 5.29 4.96 4.88 3.95 3.75 3.81 5.10 4.89 4.74 . . . Jul Aug Sep 0.18 0.19 0.19 0.75 0.75 0.75 3.25 3.25 3.25 0.41 0.32 0.28 0.16 0.16 0.15 0.98 0.78 0.74 3.01 2.70 2.65 4.72 4.49 4.53 3.69 3.44 3.63 4.56 4.43 4.35 . . . Oct Nov Dec 0.19 0.19 0.18 0.75 0.75 0.75 3.25 3.25 3.25 0.27 0.27 0.30 0.13 0.14 0.14 0.57 0.67 0.99 2.54 2.76 3.29 4.68 4.87 5.02 3.62 4.44 4.67 4.23 4.30 4.71 2011 Jan . Feb . Mar 0.17 0.16 0.14 0.75 0.75 0.75 3.25 3.25 3.25 0.29 0.28 0.28 0.15 0.13 0.10 1.03 1.28 1.17 3.39 3.58 3.41 5.04 5.22 5.13 4.86 4.79 4.47 4.76 4.95 4.84 . . . Apr May Jun 0.10 0.09 0.09 0.75 0.75 0.75 3.25 3.25 3.25 0.23 0.21 0.22 0.06 0.04 0.04 1.21 0.94 0.71 3.46 3.17 3.00 5.16 4.96 4.99 4.93 4.33 4.23 4.84 4.64 4.51 . Jul 0.07 0.75 3.25 0.24 0.04 0.68 3.00 4.93 4.31 4.55 Note: All values are given as a percent at an annual rate. Research Division Federal Reserve Bank of St. Louis 17 updated through 08/16/11 Monetary Trends M1 MZM M2 M3* Percent change at an annual rate 2006. 2007. 2008. 2009. 2010. 0.19 -0.15 4.45 14.21 6.35 4.34 9.06 14.05 9.57 -0.10 5.25 6.30 7.11 7.88 2.26 4.95 . . . . 2009 . . . 1 2 3 4 12.72 11.72 9.04 5.68 18.08 7.85 0.80 -1.16 12.45 3.47 0.92 3.00 . . . . 2010 . . . 1 2 3 4 3.42 2.30 9.04 14.00 -4.27 -2.46 4.98 7.26 -0.19 2.58 4.43 5.73 . . . . 2011 . 1 2 13.67 11.88 3.68 9.90 5.01 6.43 . . 2009 Jul . Aug . Sep 7.05 -4.45 7.56 0.48 -6.30 0.39 -0.03 -3.43 3.36 . . . Oct Nov Dec 10.15 0.06 9.78 -0.81 -0.22 -2.08 4.31 4.17 2.36 . . . 2010 Jan . Feb . Mar -8.85 15.92 6.12 -10.47 3.13 -8.96 -8.86 9.59 -3.08 . . . . . . . . . Apr May Jun -9.22 3.62 13.26 -4.74 2.06 2.79 1.52 5.55 4.10 . . . . . . Jul Aug Sep 2.16 14.19 15.75 3.77 8.31 9.07 2.23 6.35 6.61 . . . . . . Oct Nov Dec 6.84 25.57 7.34 6.85 6.93 4.17 5.59 5.22 4.55 . . . 2011 Jan . Feb . Mar 14.47 13.73 10.78 -0.89 6.16 8.19 3.35 8.33 3.85 . . . . . . Apr May Jun 6.44 20.62 10.05 10.99 11.56 9.74 4.77 7.51 12.19 . . . . Jul 36.23 20.44 26.60 . *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 11/15/2020. 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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