The nation's basic money supply fell $500 million in mid-March, the Federal Reserve said Thursday in a report that fueled a bond-market rally.
Bond prices surged and money-market rates tumbled amid a growing sense on Wall Street that interest rates are not likely to rise sharply, and might even fall, over the next few weeks, credit analysts said.
They said one of the factors contributing to that view is that the money supply, which expanded rapidly earlier this year, has leveled off lately. Traders also were relieved that the Treasury completed its end-of-the-quarter borrowing operation Thursday, analysts said.
The consensus forecast of Wall Street analysts was for a slight increase in the money supply of $400 million to $500 million in the latest week. Instead, the basic money supply, known as M1, fell to a seasonally adjusted $570.1 billion in the week ended March 18 from $570.6 billion in the previous week, the Federal Reserve said.
For the latest 13 weeks, the Fed said M1 averaged $566.2 billion, a 10.5% seasonally adjusted annual rate of gain from the previous 13 weeks. M1 represents funds readily available for spending and includes cash in circulation, checking deposits and non-bank travelers checks.
Credit watchers said that several developments, in addition to the pause in money growth, have persuaded investors that the Federal Reserve is not likely to tighten credit anytime soon.
There have been mixed signals recently as to the economy's performance, and, until the central bank receives further data on the economy's strength, the Fed's "basic strategy is to take a wait-and-see attitude," said Frank Mastrapasqua, chief economist of Smith Barney, Harris Upham & Co.
Analysts also said that testimony from Federal Reserve Board member Martha Seger earlier this week appeared to suggest that the Fed is concerned that the economy is becoming too weak and that the Fed's policy-making arm--which met privately Tuesday--did not vote to restrict the availability of credit.
Other indicators released included:
- Commercial and industrial loans at major New York City banks rose $455 million in the week ended March 20, compared to a decline of $338 million in the previous week.
- Commercial paper outstanding fell $1.217 billion in the week ended March 20; such paper increased $230 million in the previous week.
- The federal funds rate, the interest rate on short-term loans between banks, averaged 8.38% in the week ended Wednesday, down from 8.75% in the previous week.