Board of Governors of the Federal Reserve System

November 12, 2024

An Update to Measuring the U.S. Monetary Aggregates

Heather Ford and Mary-Frances Styczynski¹

On November 20, 2024, Table 1 was updated to include the "Less Federal Reserve float." row in the "Demand deposits, adjusted" component.

In 1994, a symposium was held on the measurement of the U.S. monetary aggregates. As a result of this symposium, the main components and data sources used at the time to construct the U.S. monetary aggregates were documented for posterity in A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting by Richard Anderson and Kenneth Kavajecz. Since the 1990s, the U.S. monetary aggregates evolved further, with a major redefinition in May 2020. This note provides an updated look at the U.S. monetary aggregates since the early 1990s and puts forth some ideas on how the aggregates may evolve in the future.

Aggregates from 1990s to April 2020

In analyzing the behavior of money held by the public, the Federal Reserve tracked three different monetary aggregates: M1, M2, and M3. M1 represented forms of money used in everyday transactions. At this time, M1 included money stock currency, demand deposits (adjusted) at commercial banks and U.S. branches and agencies of foreign banks and other checkable deposits (OCD). OCD included checking-like accounts (e.g., negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts) at all institutions on which a depository institution reserved the right to require seven days' written notice prior to withdrawal. This component also included demand deposits at thrift institutions (i.e., savings and loan associations and credit unions).

M2 was a broader version of the monetary aggregates than M1 and included components that were less liquid than those in M1 and often used as short-term savings vehicles. Non-M1 M2 components included savings deposits, small time deposits, and retail money market funds. Savings deposits covered accounts that a depository institution reserved the right to require seven days written notice prior to withdrawal and that were subject to the six-convenient transfer limit (see box below for more detail). Small time deposits covered certificates of deposit (CDs) with terms longer than seven days and valued in amounts less than $100,000. The $100,000 threshold was set to distinguish retail holdings of CDs from institutional holdings. The distinction between retail and institutional CDs was based on the size of the CD. Institutional CDs were defined as those that fell into the category of jumbo CDs as defined by the banking industry, so those CDs greater than or equal to $100,000. This distinction was not established to track the standard deposit insurance limit, and thus, did not increase when the deposit insurance limit increased from $100,000 to $250,000 in 2008.² Retail money market funds were measured as net assets at money funds held by retail customers.

Due mainly to the principal data source for the construction of the monetary aggregates serving a dual purpose, some netting of collected amounts were performed.³ Certain deposits were netted from the above M1 and M2 components owing to the type of depositor, account, or currency denomination. The netting attempted to produce monetary aggregates that were liquid sums of money held largely by retail depositors denominated in U.S. currency. Specific netting that was done included the subtraction of foreign official and international deposits from demand deposits (adjusted); foreign currency denominated deposits from deposit-related components of M1 and M2; and IRA and Keogh account balances at commercial banks and thrift institutions from small time deposits and similarly IRA and Keogh account balances at money market funds from retail money market funds.⁴

M3 was the broadest form of money at the time and consisted of M2 plus institutional money funds, large time deposits, repurchase agreements, and certain Eurodollar accounts. Institutional money market funds were measured as net assets at money funds held by institutional customers. Large time deposits captured time deposits held at depository institutions with values greater than or equal to $100,000. Repurchase agreements represented liabilities of depository institutions, in denominations of $100,000 or more, on U.S. government and federal agency securities, excluding those amounts held by depository institutions, the U.S. government, foreign banks and official institutions, and money market mutual funds. Eurodollars measured balances held by U.S. addressees at foreign branches of U.S. banks worldwide and at all banking offices in the United Kingdom and Canada, excluding those amounts held by depository institutions, the U.S. government, foreign banks and official institutions, and money market mutual funds.⁵

M3 was discontinued in 2006 because the Federal Reserve Board judged that the aggregate did not improve upon the information already provided via M2 and did not inform the monetary policy process.⁶ After 2006, the Federal Reserve published two aggregates and their components: M1 and M2. The definition and construct of the monetary aggregates remained stable from 2006 until May 2020 apart from a small redefinition of M1 in 2019. M1 was revised in January 2019 to discontinue the recording of the outstanding amount of U.S. dollar-denominated traveler's checks of nonbank issuers.⁷

Today's Aggregates: May 2020 to the present

In March 2020, the Federal Reserve lowered the ratios on reserve requirements to zero percent, effectively eliminating reserve requirements for depository institutions.⁸ The Federal Reserve took this action to ensure banks were able to provide as much liquidity as possible to the economy during the early days of the pandemic. This decision impacted the monetary aggregates indirectly by calling into question the need for the six-convenient transfer limit from savings deposits as there was no longer a need to distinguish between transaction accounts and savings deposits.

In April 2020, the Federal Reserve eliminated the six-convenient transfer limit.⁹ By regulation, a savings deposit at a depository institution was now defined as an account that the bank may require seven days written notice before a withdrawal. The transfer limit concept disappeared from a regulatory perspective. The definitional change took effect in May 2020. The regulatory definitional change did not necessarily change bank practices. Depository institutions could choose to continue to impose the six-convenient transfer limit, but the limit would no longer be required by regulation. The question then became where saving deposits should be placed in the monetary aggregates: should it remain in M2 or move to M1? The liquidity of a savings deposit increased after the removal of the six-convenient transfer limit, and it definitionally appeared similar to OCD – a M1 component. Savings deposits were moved to M1 and a new component, called other liquid deposits, was created to combine saving deposits and OCD given the similarities in definitions.

Reflecting these changes, M1 expanded in May 2020 to cover money stock currency, demand deposits (adjusted), and other liquid deposits. The non-M1 M2 components were left as small time deposits and retail money market funds. Table 1 provides a consolidated look at the definition, frequency, and sources used to produce today's monetary aggregates. Many of the components rely on a mixture of weekly and quarterly data sources. For instance, the new component, other liquid deposits, relies on weekly and quarterly data. The weekly data are collected from the FR 2900, the "Report of Deposits and Vault Cash". Daily data for a report week is collected once a week from a select group of depository institutions.¹⁰ To estimate the monetary aggregates for the entire banking system, quarter-end data from the quarterly Call Reports are used.¹¹

Table 1: Today's Aggregates: Components and Data Sources

What the future may hold?

The definition and the construct of M1 and M2 was stable over the last three decades up until May 2020, when there was a major redefinition of savings deposits. The future may again be stable or could have changes given technological developments in the payments system. For example, where would digital currencies or stablecoins with similar liquidity characteristics to commercial bank deposits belong in the monetary aggregates? These and other developments around money remain top of mind for staff, and we will continue to track developments to determine how the monetary aggregates need further refinement.

References

Anderson, Richard, Kavajecz, Kenneth (1994). "A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting." March/April. Federal Reserve Bank of St. Louis Review, pp 1-66.

Federal Deposit Insurance Corporation (2010). "Basic FDIC Insurance Coverage Permanently Increased to $250,000 Per Depositor." July 21. Press Release.

Federal Reserve Board (2006). "Discontinuance of M3." March 9. Press Release.

Federal Reserve Board (2018). "Special Notice." December 18. Announcements.

Federal Reserve Board (Mar 2020). "Federal Reserve Actions to Support the Flow of Credit to Households and Businesses." March 15. Press Release.

Federal Reserve Board (Apr 2020). "Federal Reserve Board announces interim final rule to delete the six-per-month limit on convenient transfers from the "savings deposit" definition in Regulation D." April 24. Press Release.

Federal Reserve Board (Dec 2020). "Revisions to the H.6 Statistical Release." December 17. Announcements.

Federal Reserve Board (2021). "First Monthly H.6 Statistical Release." February 23. Announcements.