The nation's basic money supply rose $4.5 billion in mid-May, the Federal Reserve Board reported Thursday. The surge was twice as large as most analysts had expected, and bond prices slipped afterward.
One analyst said the increase reduced the chances that the Fed would relax its credit policy to encourage lower interest rates and more rapid economic growth.
"You can assume that the Fed is not going to ease further at least until the June (policy-making) meeting," said Elliott Platt, an economist for the investment firm of Donaldson, Lufkin & Jenrette. "It puts their policy on hold."
Another economist, W. Lee Hoskins of PNC Financial, a bank holding company in Pittsburgh, said the Fed probably knew that the money supply would be growing rather rapidly in May when it reduced its discount rate, or lending charge to financial institutions, on May 17.
"If this growth continues over the next couple of weeks, it is less likely that the Fed will chop the discount rate further," he said.
The Fed said M1 rose to a seasonally adjusted average of $582.3 billion in the week ended May 20 from $577.8 billion the previous week. M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks.
For the latest 13 weeks, M1 averaged $574.8 billion, a 9.7% 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.
In advance of the report, the median estimate of 41 economists surveyed by Money Market Services of Belmont, Calif., was for a $2-billion increase.
Many economists have argued that the Fed, showed in cutting the discount rate to 7.5% from 8% on May 17, that it was more concerned about the recent slow pace of economic growth than about expansion in the money supply.
The Fed explained when it took that step that it had acted "against the background of relatively unchanged output for some time in the industrial sector" and despite faster money growth than its annual money growth targets implied.
PNC's Hoskins said the latest bulge in the money supply was probably caused by the government's lateness in sending out tax refunds. "The seasonal adjustments just aren't there to account for inflows of tax returns into the banking system this late," he said.
Raymond Stone, director of money-market research for Merrill Lynch Capital Markets, said the increase "probably means very little" because week-to-week changes in the M1 figure are so volatile.
"The question is does this delay any more easing, and I think that at best this is a minor factor in terms of that decision," he said.
Other indicators released Thursday included:
- Commercial and industrial loans on the books of leading New York banks fell $291 million in the week ended May 22, compared to a decline of $561 million the previous week, according to the Federal Reserve Bank of New York.
- Commercial paper outstanding nationally rose $2.03 billion in the week ended May 22, following a $752-million increase the previous week.
- Paper issued by financial companies rose $1.328 billion in the latest week, while paper issued by non-financial companies was up $702 million.
- The nation's banking system averaged free reserves of $223 million in the two weeks ended May 22, compared to free reserves of $145 million for the previous two-week period.
- Borrowings from the Federal Reserve System averaged $1.065 billion in the two-week period ended May 22, up from $557 million in the previous two weeks.
- Total reserves averaged $41.66 billion in the two weeks, up from $40.93 billion in the previous two weeks.
- Borrowings from the Fed averaged $487 million in the week ended Wednesday, down from $1.29 billion the previous week.
- 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 $225.2 billion, up from $224.9 billion a week earlier.