Full text of U.S. Financial Data : December 2, 1999

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December 2, 1999

USFinancialData
THE WEEK’S HIGHLIGHTS:
The Federal Reserve System has anticipated a sharp upswing toward
the end of the year in the demand for currency. Although currency
demand usually picks up appreciably during the Christmas season,
this year’s increase is expected to be greater than usual because of
the so-called “Y2K effect.” Because the Fed has agreed to meet this
increased demand, growth of the monetary base—what the textbooks
refer to as “high-powered” money—and the M1 monetary aggregate
will accelerate. The process works as follows.
An increase in currency supplied to depository institutions (DIs)
increases their vault cash, and thus both adjusted reserves and the
adjusted monetary base (AMB). Growth of total vault cash at DIs
has accelerated dramatically recently, up 17.7 percent in November
from a year earlier based on preliminary data (versus 0.5 percent
growth between November 1997 and November 1998). This development
helps to explain why AMB growth has accelerated since August (see
Page 2). Little of this new vault cash is being used to satisfy reserve
requirements; most of it is “surplus.”
To date, growth of currency outside of DIs has accelerated modestly:
After increasing 8.4 percent between November 1997 and November
1998, currency has grown 10.4 percent for the average of the four weeks
ending on Nov. 22 from the same period a year earlier (see Page 5).
The growth rates of M1 and M2 have not accelerated like the AMB’s
rate. But if the public becomes very hungry for currency later this
month, then M1 and M2 growth will increase sharply. Regardless,
this phenomenon is expected to be temporary, with no lasting
consequences for money growth, and hence inflation.
All data are seasonally adjusted unless otherwise indicated.
U.S. Financial Data is published weekly by the Research Division of the Federal Reserve Bank of
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