M1 Tumbles $6.8 Billion in Mid-October : Analysts Say Seasonal and Technical Factors Responsible for Drop

The nation’s basic money supply, known as M1, plunged $6.8 billion in mid-October, the Federal Reserve Board reported Thursday, a drop that analysts attributed largely to seasonal and technical factors.

Although the drop was bigger than many analysts had predicted, interest rates were little changed following the release of the report late Thursday.

But some analysts said the recent retreat in M1 had raised hopes that the explosive growth in the money supply earlier this year was cooling off, something that would reduce chances that the Fed would adopt a more restrictive policy and push interest rates higher.

Despite optimism about M1, interest rates have been propped up recently by a huge schedule of U.S. Treasury borrowing that has been delayed by the congressional stalemate on raising the national debt limit. And even with the latest decline, M1 remained above the upper limits of the growth range that the Fed has said it seeks in its attempt to stimulate non-inflationary economic growth.

Falls to $605.1 Billion

The Fed said M1, which represents funds readily available for spending, fell to a seasonally adjusted $605.1 billion in the week ended Oct. 14 from a revised $611.9 billion in the previous week. The previous week’s figure originally was estimated at $611.5 billion.

M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks.

For the latest 13 weeks, M1 averaged $606.6 billion, a 14.1% seasonally adjusted annual 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.

Analysts said the credit markets had expected the drop in M1 because of technical reasons. They expected a significant increase in M1 to be reported next week.

Reasons for the drop included the bank holiday in the most recent reporting week. Because many large banks were closed for Columbus Day on Monday, Oct. 14, money taken from corporate checking accounts on the previous Friday for weekend investment in interest-bearing accounts was not placed back into accounts included in M1 until Tuesday.

“The (Fed’s) seasonal adjustment factors did not account for that difference in our opinion,” said Ray Stone, chief financial economist for Merrill Lynch. “It depressed the weekly number received tonight at the expense of next week’s number.”

William Sullivan, director of money-market research for Dean Witter Reynolds, also noted that the latest week’s figures continued an adjustment from a late-September bulge in M1 that had been attributed to the closing of many major East Coast businesses on Sept. 27 because of Hurricane Gloria.

“For the last three weeks, we really haven’t gotten a clear read on the money supply,” Sullivan said. “There’s a definite slowdown in money supply taking place, but I think a clearer view lies ahead.”

Analysts noted that, although M1 still remained significantly above the Fed’s targets, overall growth had slowed in the past few weeks.

“When you see through these aberrations, you see moderation in M1 growth,” said Philip Braverman, chief economist for Briggs Schaedle & Co.

In other reports:

- The Federal Reserve Bank of New York reported that commercial and industrial loans at major New York City banks rose $152 million in the week ended Oct. 16, compared to a decline of $770 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 $231.8 billion in the week ended Wednesday, up from $230 billion a week earlier.

- The Federal Reserve said bank borrowings from the Federal Reserve System averaged $634 million in the week ended Wednesday, up from $305 million in the previous week. For the two weeks ended Wednesday, bank borrowings averaged $469 million, against $768 million in the previous two weeks.

- The Fed said total adjusted reserves of member banks averaged $43.55 billion in the two-week period ended Wednesday, down from $43.6 billion a week earlier.

- The Fed said banks averaged free reserves of $274 million in the two weeks ended Wednesday, against net borrowed reserves of $100 million in the previous two-week period. When banks are net borrowers, reserves are scarcer, something analysts watch for clues on whether the Fed is being more restrictive.