Money Supply Grows by $4 Billion in Week
The nation’s basic money supply jumped $4 billion in late June, the Federal Reserve Board reported Thursday.
The increase was more than twice as large as many analysts had expected, and it dimmed hopes that the Fed would relax its monetary policy any time soon.
Bond prices, which were lower in advance of the late-afternoon report, extended their decline afterward.
The Fed said the basic supply, called M1, rose to a seasonally adjusted average of $596 billion in the week ended July 1 from $592 billion in the previous week. M1 includes cash in circulation, checking deposits and non-bank travelers checks.
For the month, M1 averaged $591.1 billion, compared to $581.6 billion in May. For the latest 13 weeks, M1 averaged $582.8 billion, a 10.4% seasonally adjusted annual rate of gain from the previous 13 weeks.
$1.5-Billion Growth Estimated
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 money supply report, the median estimate of 44 analysts surveyed by Money Market Services of Belmont, Calif., called for an increase of $1.5 billion in M1 for the latest week.
“The M1 gain was well beyond the consensus expectation,” said William Sullivan, director of money-market research for the investment firm Dean Witter Reynolds. He said M1’s growth in June alone approached 20%.
“We continue to be confronted with a very brisk pattern of money growth,” he said. The rapid growth, he added, “calls into question the need for an immediate accommodation by the Fed.”
The Federal Open Market Committee, the central bank’s policy-making arm, met privately for two days this week to plot a credit policy strategy.
Its aim has been to permit enough growth in the money supply to allow steady, non-inflationary economic growth. The minutes of the Fed’s private meeting will not be made public for several weeks, however.
Pockets of Economic Weakness
Recent government reports have suggested that the economy contains pockets of weakness, even as the money supply has maintained a growth rate larger than the Fed’s growth targets prescribe.
Sullivan said he thinks it is still possible that the Fed would take steps this summer to relax its monetary policy but “only when we see a more moderate pattern in money growth.”
Ward McCarthy, senior money-market economist for Merrill Lynch Capital Markets, said he thinks that the Fed may have decided at its meeting this week to de-emphasize M1 as a consideration in setting its credit policy.
He said Fed policy-makers are likely to be more concerned about the past week’s decline in the dollar and will avoid any further relaxation in credit policy that could cause a disorderly acceleration of that decline.
The Fed also released statistics on two broader measures of the money supply, which it reports on monthly.
It said the M2 measure of the money supply, which is made up of M1 and such accounts as savings deposits and money-market mutual funds, rose $28 billion in June and averaged $2.473 trillion for the month, compared to $2.445 trillion in May.
And it said that M3, which is the sum of M2 plus less liquid accounts such as certificates of deposit in minimum denominations of $100,000, rose $27 billion to an average of $3.102 trillion in June from $3.075 trillion in May.
In other reports:
- The Federal Reserve Bank of New York reported that commercial and industrial loans at major New York City banks rose $18 million in the week ended July 3, compared to a decline of $761 million a week earlier.
- Commercial paper outstanding nationally fell $808 million, following a $1.9-billion increase in the previous week.
- The nation’s banking system averaged free reserves of $628 million in the two weeks ended July 3, compared to free reserves of $211 million in the previous two-week period.
- Borrowings from the Federal Reserve System averaged $547 million in the two-week period, up from $511 million in the previous two-week period.
- Total reserves averaged a seasonally adjusted $42.68 billion in the two weeks, up from $41.995 billion in the previous two-week period.
- 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 $229.2 billion, up from $226.9 billion a week earlier.
