Money Supply Grows by $5.3 Billion in Week

The nation’s basic money supply leaped ahead by $5.3 billion in early August, the Federal Reserve Board reported Thursday. The surge left the money measure well ahead of the central bank’s growth targets.

Credit market analysts had been looking for an increase of only about $2 billion, and they said the increase reduced chances that the Fed would relax its monetary policy to stimulate what has been a sluggish economy.

The Fed said M1 rose to a seasonally adjusted average of $601.9 billion in the week ended Aug. 5 from a revised $596.6 billion in the previous week. The previous week’s figure was originally reported as $595.4 billion.

M1, which includes cash in circulation, deposits in checking accounts and non-bank travelers checks, averaged $595.7 billion in July, up from $591.2 billion in June.

For the latest 13 weeks, M1 increased at an annual rate of 12.5% from the previous 13 weeks.

The Fed has said it would like to see M1 grow between 3% and 8% from the second quarter of this year through the fourth quarter.

The central bank tries to control money supply growth because it believes that overly rapid expansion will contribute to inflation. It wants to allow enough money growth, however, so that the economy can expand steadily and with a minimum of inflation.

“The economy has been lackluster while we continue to have surprisingly strong money growth,” said Raymond Stone, manager for financial economics at Merrill Lynch Capital Markets.

“If the money supply had been growing more moderately, the Fed may have eased. But this fast money growth will preclude that for the immediate future,” he said.

Maury Harris, chief economist for Paine Webber, agreed that the Fed might have eased in response to current economic conditions if it were not for the rapid growth in the money supply. “The way the Fed handles this is that it doesn’t address the erratic economy right now,” Harris said.

Harris and Stone each said they expect the Fed to stick to its present course when its policy-makers meet next week.

In advance of the M1 report, the median estimate of 42 analysts surveyed by Money Market Services Inc., a research concern in Belmont, Calif., called for a $2-billion rise in M1. The highest estimate was a rise of $3.8 billion.

The Fed also released its monthly reports on growth in two broader measurements of the money supply.

It said M2, which is made up of M1 and such accounts as savings deposits and money-market mutual funds, rose $17.7 billion in July to $2.4903 trillion. Analysts had been looking for a $15-billion increase in M2. The increase left M2 close to the Fed’s upper growth target of 9%, Harris said.

The Fed said M3, which is the sum of M2 plus less-liquid accounts, such as certificates of deposit in minimum denominations of $100,000, rose $10.8 billion in July to $3.1141 trillion. The median expectation of analysts surveyed in advance of the report was for a M3 rise of $11.3 billion.