The nation's basic money supply climbed $2.6 billion in late May, the Federal Reserve Board reported Thursday. The gain was larger than most analysts had estimated, but it caused barely a ripple in the bond markets.
Analysts said the credit markets were preoccupied by the state of the economy and the May unemployment report due for release today for clues about what the Fed's next steps on monetary policy might be.
The Fed said its M1 measure of the basic money supply rose to a seasonally adjusted average of $584.9 billion in the week ended May 27 from $582.3 billion in the previous week. M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks and represents the money readily available for spending.
For the latest 13 weeks, M1 averaged $575.7 billion, a 9.4% 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 latest report, a survey of 42 analysts by Money Market Services Inc. of Belmont, Calif., found most of them expecting an increase of around $1.3 billion in the M1 figure. Individual estimates ranged from a decline of $1 billion to a rise of $3 billion.
After the report was released at 4:30 p.m. EDT, bond prices and short-term interest rates held fairly steady.
Prices of some long-term Treasury bonds were down nearly a quarter point, or $2.50 for every $1,000 in face value, 30 minutes after the report was released, about the same as before the report. Treasury bill yields, which move in the opposite direction of bond prices, held on to most of their one-tenth of a percentage point gain for the day.
Maury N. Harris, chief economist at the investment firm Paine Webber, said the larger-than-expected increase in M1 would normally "be a negative development" for the bond markets, depressing prices on expectations that the Fed would try to bring M1 back within target to avoid a revival of inflation.
"But nobody seems to think the Fed is going to tighten now because M1 is over the target range," Harris said.
He said the M1 figure has grown rapidly this year while the economy has slowed, and, as a result, become a less reliable indicator of economic trends.
The unemployment report due out today, Harris said, is likely to provide evidence about whether the steps the Fed has already taken to encourage lower interest rates have produced the desired effect of stimulating economic growth.
Those steps included a cut of half a percentage point--to 7.5%--in the discount rate, or the Fed's interest charge on loans to banks, on May 17.
Harris said that, if the May employment statistics were weak, the Fed might reduce the discount rate further.
"The focus is on the employment data right now," said William Sullivan, director of money-market research for the investment firm Dean Witter Reynolds.
Other indicators included:
- Commercial and industrial loans on the books of leading New York banks fell $381 million in the week ended May 29, compared to a decline of $291 million in the previous week, the Federal Reserve Bank of New York said.
- Commercial paper outstanding nationally rose $228 million in the week ended May 29, compared to a rise of $2.03 billion in the previous week. Paper issued by financial companies rose $531 million, while paper issued by non-financial companies was down $759 million.
- The nation's banking system averaged free reserves of $243 million in the two-week period ended Wednesday, compared to free reserves of $206 million in the previous two-week period.
- Borrowings from the Federal Reserve System averaged $604 million in the two-week period ended Wednesday, down from $1.065 billion in the previous two-week period.
- Total reserves averaged $41.342 billion in the two-week period, down from $41.683 billion in the previous two-week period.
- Borrowings from the Fed averaged $721 million in the week ended Wednesday, up from $487 million in 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 $228.0 billion, up from $225.2 billion a week earlier.