The nation's basic money supply contracted by $2.1 billion in early March, the Federal Reserve said Thursday in a report that pleasantly surprised Wall Street.
Many credit analysts had looked for a small increase of about $500 million in the latest week, and the decline--together with a report of sluggish economic growth in the current quarter--fueled a rally in the bond market.
The bond market viewed the economic growth and money supply reports as providing the Federal Reserve with little reason to tighten its hold on credit, thereby precluding a sharp rise in interest rates, analysts said.
"It looks like rates are going to stay where they are at least for the next two or three months," said Thomas D. Thomson, economist with Crocker National Bank in San Francisco.
The basic money supply, called M1, fell to a seasonally adjusted $570.6 billion in the week ended March 11 from a revised $572.7 billion in the previous week, the Fed said. The previous week's figure originally was reported as $572.4 billion.
M1 represents funds readily available for spending and includes cash in circulation, checking deposits and non-bank travelers checks.
Wall Street has been sharply divided recently as to the outlook for economic growth, interest rates and the dollar.
Specifically, opinions were mixed as to whether the economy and the money supply were growing at such a brisk rate as to prompt the Federal Reserve to tighten credit as part of its effort to curb higher inflation.
But the latest decline in M1 helped slow the recent growth of the money supply, and the Commerce Department's report on economic growth threw cold water on suggestions that the economy might be rapidly picking up steam.
The economy, as measured by the gross national product, is expanding at an annual rate of only 2.1% in the current quarter, down sharply from 4.3% in last year's fourth quarter, the agency said.
As a result, "the Fed will stay pretty much with their current policy stance" when its policy-making arm, the Federal Open Market Committee, meets next Tuesday, Thomson predicted.
"The slowing economy and money supply imply a lower probability of the Fed tightening credit conditions," said Elliott Platt, economist with the investment firm of Donaldson, Lufkin & Jenrette Inc. The developments also "imply a better inflation rate," he added.
For the latest 13 weeks, M1 averaged $565.2 billion, a 10% seasonally adjusted annual rate of gain from the previous 13 weeks. The Fed has said it would like to see M1 grow between 4% and 7% from the fourth quarter of 1984 through the fourth quarter of 1985, a slightly narrower growth range than the 4% to 8% of the previous year.
Other indicators released included:
- The Federal Reserve Bank of New York reported that commercial and industrial loans at major New York City banks fell $338 million in the week ended March 13, compared to a revised gain of $884 million a week earlier. The previous week's gain originally was reported as $788 million.
- Commercial paper outstanding rose $83 million in the week ended March 13, compared to an increase of $1.421 billion the previous week.
- Member bank borrowings from the Federal Reserve System averaged $519 million in the week ended Wednesday, down from $862 million the previous week.
- Total adjusted reserves of member banks averaged a seasonally adjusted $40.533 billion in the two weeks ended March 13, up from $40.375 billion in the previous period.
- The nation's banking system averaged free reserves of $110 million in the two weeks ended March 13, down from $235 million in the previous two weeks.
- The Federal Reserve Bank of St. Louis reported that the monetary base--the seasonally adjusted total of member bank reserves held at Federal Reserve banks and cash in bank vaults and in circulation--was $220.8 billion as of Wednesday, down from $222.3 billion a week earlier.