The nation’s basic money supply plunged $3.3 billion in mid-September, ending an explosive eight-week surge, the Federal Reserve Board reported Thursday.
Analysts said that the decline in the measure, known as M1, was bigger than had been expected but that M1 had grown so much in the previous two months that it still remained far above the target that the Fed set in its attempt to stimulate non-inflationary economic growth.
In the previous eight weeks, M1 had shot up by $21.9 billion.
“It’s still fluttering in the stratosphere,” said Maury Harris, chief economist at the investment firm of Paine Webber. “We have a lot of erasing of past weeks to do before (financial) markets get excited.”
Review of Strategy
Federal Reserve policy-makers will meet next week to review strategy, but Harris said he expects monetary policy to remain unchanged.
The Fed said M1 fell to a seasonally adjusted $610.4 billion in the week ended Sept. 16 from a revised $613.7 billion in the previous week. The previous week’s figure originally was reported at $613.4 billion.
M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks, representing funds readily available for spending.
The Fed, in its attempt to provide enough money to keep the economy growing without rekindling higher inflation, has said it would like to see M1 grow between 3% and 8% in the second half of this year.
For the latest 13 weeks, however, M1 averaged $601.7 billion, a 15.1% seasonally adjusted annual rate of gain from the previous 13 weeks.
Harris calculated M1 at $11.7 billion above the upper limits of the Fed’s growth range. He said that was too far over target to allow the Fed to relax its policy and accommodate lower interest rates in its attempt to reduce the value of the dollar.
“Clearly the desire to bring the dollar down precludes a tightening of rates, but at the same time, money supply growth is still too high over target to bring down rates,” Harris said.
Donald Maude, chief economist at Refco Partners, said, “It would still stretch credibility for the Fed to ease” in the face of the excessive money-supply growth.
In the bond market, long-term interest rates dipped briefly after the money supply figures were released at 4:30 p.m. EDT, then edged back up to earlier levels.
Beryl W. Sprinkel, the chairman of the President’s Council of Economic Advisers, told Congress on Wednesday that the biggest uncertainty in an otherwise bright economic outlook was the rapid growth of the money supply.
“If we continue this accelerated rate of growth in money--which I don’t understand and which I don’t think the Federal Reserve understands--this would lead to very serious inflation,” Sprinkel said.
In other reports:
- The Federal Reserve Bank of New York said that commercial and industrial loans at major New York City banks rose $589 million in the week ended Wednesday, compared to a decline of $423 million a week earlier. It said that commercial paper--or short-term corporate IOUs--outstanding nationwide rose $2.83 billion after falling $622 million in the previous week.
- The Federal Reserve said bank borrowings from the Federal Reserve System averaged $608 million in the week ended Sept. 25, up from $421 million in the previous week. For the two weeks ended Sept. 25, borrowings averaged $515 million, down from $723 million in the previous two weeks.
- The Fed said total reserves of member banks averaged a seasonally adjusted $43.52 billion in the two weeks ended Sept. 25, up from $43.37 billion in the previous two-week period. It said the banking system averaged free reserves of $46 million in the latest two weeks, against net borrowed reserves of $39 million for the previous period. Free reserves are a sign that funds are plentiful in the banking system.
- 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 $232 billion in the week ended Sept. 18, up from $230.4 billion a week earlier.