Money Supply Declines $3.3 Billion
The nation’s basic money supply plunged $3.3 billion in the first week of October, erasing part of the previous week’s $5.1-billion upward surge, the Federal Reserve Board reported Thursday.
Analysts said the money supply measure known as M1 and representing funds readily available for spending still remained well above the upper limits of the growth targets set by the Fed in its attempt to encourage non-inflationary economic growth.
But the financial economists also said that, until the economy demonstrates much greater strength, the Fed is likely to ignore the bulge in M1 and refrain from pushing interest rates higher to slam the brakes on the money supply. Interest rates, which already had been falling in credit markets, inched down even further after the figures were released late Thursday.
The Fed said M1 fell to a seasonally adjusted $611.5 billion in the week ended Oct. 7 from a revised $614.8 billion in the previous week. The previous week’s figure originally was reported as $615 billion.
14.4% Growth Rate
The Fed, which tries to provide enough funds to keep the economy growing without reviving inflation, has said it would like to see M1 grow between 3% and 8% from the second quarter of this year through the fourth quarter. But for the latest 13 weeks, M1 averaged $605.6 billion, a 14.4% seasonally adjusted annual rate of gain from the previous 13 weeks.
Normally, such explosive growth would upset financial markets and send interest rates soaring in anticipation of a more restrictive Fed policy aimed at curbing M1. Instead, interest rates have held fairly steady for months.
Maury Harris, chief economist at the New York securities firm Paine Webber Inc., said that, since the economy is not reflecting the rapid growth exhibited by M1, the Fed has been skeptical about the implications of the money supply’s performance.
Member bank borrowings from the Federal Reserve averaged $305 million in the week ended Wednesday, down from $720 million in the previous week.
Meanwhile, Harris said the sharp drop in M1 in early October indicated that most of the previous week’s massive increase was related to the impact of Hurricane Gloria, which closed financial markets on Sept. 27. Because most major Eastern banks and corporate offices were closed on the Friday that the storm swept up the Atlantic Coast, surplus money was left in checking accounts over the weekend that otherwise would be invested outside of M1, he said.
M1 consists of cash in circulation, deposits in checking accounts and non-bank travelers checks.
In other reports:
- The Federal Reserve Bank of New York reported that commercial and industrial loans at major New York City banks fell $770 million in the week ended Oct. 9, compared to a gain of $181 million a week earlier. It said commercial paper outstanding nationwide, or short-term corporate IOUs, rose $2.97 billion in the week ended Oct. 9, against a gain of $694 million a week earlier.
