Source: Federal Reserve Bank of St. Louis  

Release: Money Velocity

Units:  Ratio, Seasonally Adjusted

Frequency:  Quarterly

Calculated as the ratio of quarterly nominal GDP to the quarterly average of M2 money stock.

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money. There are several components of the money supply,: M1, M2, and MZM (M3 is no longer tracked by the Federal Reserve); these components are arranged on a spectrum of narrowest to broadest. Consider M1, the narrowest component. M1 is the money supply of currency in circulation (notes and coins, traveler's checks [non-bank issuers], demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.

Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1. For more information on the H.6 release changes and the regulatory amendment that led to the creation of the other liquid deposits component and its inclusion in the M1 monetary aggregate, see the H.6 announcements and Technical Q&As posted on December 17, 2020.


MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler's checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The velocity of MZM helps determine how often financial assets are switching hands within the economy.

Source: Board of Governors of the Federal Reserve System (US)  

Release: H.15 Selected Interest Rates  

Units:  Percent, Not Seasonally Adjusted

Frequency:  Monthly

Averages of daily figures.

For additional historical federal funds rate data, please see Daily Federal Funds Rate from 1928-1954.

The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. (1) The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate.(2) The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve as it uses the Interest on Reserve Balances rate to steer the federal funds rate toward the target range.(2)

The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target range. The Fed's primary tool for influencing the federal funds rate is the interest the Fed pays on the funds that banks hold as reserve balances at their Federal Reserve Bank, which is the Interest on Reserves Balances (IORB) rate. Because banks are unlikely to lend funds in the federal funds market for less than they get paid in their reserve balance account at the Federal Reserve, the Interest on Reserve Balances (IORB) is an effective tool for guiding the federal funds rate. (3) Whether the Federal Reserve raises or lowers the target range for the federal funds rate depends on the state of the economy. If the FOMC believes the economy is growing too fast and inflation pressures are inconsistent with the dual mandate of the Federal Reserve, the Committee may temper economic activity by raising the target range for federal funds rate, and increasing the IORB rate to steer the federal funds rate into the target range. In the opposing scenario, the FOMC may spur greater economic activity by lowering the target range for federal funds rate, and decreasing the IORB rate to steer the federal funds rate into the target range. (3) Therefore, the FOMC must observe the current state of the economy to determine the best course of monetary policy that will maximize economic growth while adhering to the dual mandate set forth by Congress. In making its monetary policy decisions, the FOMC considers a wealth of economic data, such as: trends in prices and wages, employment, consumer spending and income, business investments, and foreign exchange markets.

The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence.(2)

References
(1) Federal Reserve Bank of New York. "Federal funds." Fedpoints, August 2007.
(2) Monetary Policy, Board of Governors of the Federal Reserve System.
(3) The Fed Explained, Board of Governors of the Federal Reserve System

For further information, see The Fed's New Monetary Policy Tools, Page One Economics, Federal Reserve Bank of St. Louis.

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