Money Supply Expands by $4.8 Billion in Early June
The nation’s basic money supply, known as M1, surged up $4.8 billion in early June, the Federal Reserve Board said Thursday in a report that sent open-market interest rates rising and dampened traders’ hopes for a cut in the discount rate.
The rise in M1 was sharper than had been expected and left the measure of funds readily available for spending about $15 billion above the upper limits of the growth range set by the Fed in its attempt to stimulate the economy without reviving higher rates of inflation.
Despite rapid money supply growth, hopes had been high in recent weeks that the Fed soon would cut its discount rate because economic growth was sluggish. The discount rate is the interest the Fed charges on loans to financial institutions.
Analysts said the outlook for a discount-rate cut began changing Thursday morning, however, when the Commerce Department estimated that the economy is growing at an annual rate of 3.1% in the current quarter after an anemic 0.3% rise in the gross national product during the first three months of the year.
Late in the day, the Fed said M1 rose to a seasonally adjusted $590.6 billion in the week ended June 10 from a revised $585.8 billion in the previous week. The previous week’s figure originally was reported as $585.6 billion.
M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks.
For the latest 13 weeks, M1 averaged $578.2 billion, a 9.1% 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.
“The money supply numbers this afternoon, coupled with the GNP figures earlier in the day, precludes a discount-rate cut in the foreseeable future,” said Elliott Platt, an economist at Donaldson, Lufkin & Jenrette, a New York securities firm.
Platt said that, with the economy starting to expand, the Fed has to be concerned about the robust growth in the money supply.
Jeffrey Leeds, an economist at Chemical Bank in New York, said that “the market’s reassessing the probability of a discount-rate cut in the very near future.”
He said the economy’s renewed growth and rapid money supply growth “suggests the Fed may elect to stand pat with policy rather than push rates down further.”
Harold Nathan, an economist at Wells Fargo Bank in San Francisco, said investors interpreted the money supply report “as a negative for a discount-rate cut soon, in the next few weeks.”
But Nathan said that, when the Fed last cut the discount rate a month ago--a reduction to 7.5% from 8%--it acted in the face of a rapidly expanding money supply.
Nathan said he does not believe that the continued sharp growth in M1 is a constraint on further accommodation by the Fed.
“I don’t think they’re paying much attention to M1,” Nathan said.
In other reports:
- The Federal Reserve Bank of New York said commercial and industrial loans at major New York City banks fell $350 million in the week ended June 12, compared to a gain of $317 million a week earlier. It said commercial paper--short-term corporate IOUs--outstanding nationwide declined $130 million in the week ended June 12 after rising $147 million in the previous week.
- The Federal Reserve said borrowings from the Federal Reserve System averaged $511 million in the two-week period ended Wednesday, down from $604 million in the previous two weeks.
- The Federal Reserve estimated that the banking system averaged free reserves of $130 million in the two-week period ended Wednesday, compared to free reserves of $197 million in the previous two weeks. Free reserves are a sign that funds are plentiful in the banking system. Total adjusted reserves of member banks averaged a seasonally adjusted $42.669 billion in the two weeks ended Wednesday, up from $41.352 billion 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 $226.8 billion in the week ended Wednesday, down from $229.1 billion a week earlier.