Money Supply Surges by $2.8 Billion in Week
The nation’s basic money supply shot up $2.8 billion in mid-August, the Federal Reserve Board reported Thursday.
The increase was larger than had been expected and continued an explosive spurt that has propelled M1 well above the upper limits of the growth targets set by the Fed in its attempt to keep the economy expanding without reviving higher rates of inflation.
There was little reaction to the report in the bond markets, however. Traders have been ignoring M1 until the Fed indicates that it is paying more attention to that measure in setting policies affecting the course of interest rates.
After the report was released at 4:30 p.m. EDT, yields on 30-year Treasury bonds edged up just two hundredths of a percentage point.
“It was taken with a yawn,” said Robert Sinche, chief economist at Bear, Stearns & Co., a New York investment firm. “The market senses the Fed is not going to do anything based on the money supply alone.”
The Fed said M1 rose to a seasonally adjusted $606 billion in the week ended Aug. 19 from $603.2 billion in the previous week. M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks.
For the latest 13 weeks, M1 averaged $594.8 billion, a 13.9% seasonally adjusted annual rate of gain 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.
M1 already stands above the level that the Fed has set for the end of the year, said David Wyss, chief financial economist at Data Resources, a private economic consulting service in Lexington, Mass.
“M1 appears to be losing all touch with economic reality,” he said. “Runaway growth of M1 would normally be associated with increased economic activity. But there are no signs the economy is moving.”
The rise in M1 restricts the Fed’s ability to push interest rates lower in an attempt to stimulate economic growth, Wyss said. Such an accommodative move by the Fed would risk destroying the reputation that it has built in the 1980s as an inflation fighter.
But he said that, until above-target M1 growth spreads to broader money supply measures, it probably will not lead the central bank to push interest rates higher. Such a restrictive move could lead to a recession in 1986, he warned.
Meantime, a study published Wednesday by the Federal Reserve Bank of New York downgraded the importance of M1 in recent years as an indicator of future economic trends.
Carl Palash and Lawrence Radecki, both senior economists at the New York Fed, said M1 had a good record in predicting imminent recessions during the 1950s and 1960s. But M1 seemingly “lost all its leading indicator properties in the 1970s and 1980s,” they said.
In other reports Thursday:
- The Federal Reserve Bank of New York said commercial and industrial loans at major New York City banks fell $57 million in the week ended Aug. 21, compared to a decline of $153 million a week earlier.
- 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 $229.3 billion in the week ended Wednesday, up from $227.1 billion a week earlier.
