Money Supply’s $1.7-Billion Rise Jolts Analysts

The nation’s basic money supply rose $1.7 billion in mid-May, the Federal Reserve Board reported Thursday, giving the credit markets a surprise.

Traders had been expecting the money supply to show little change. Bond prices, which were up a bit for the day, dipped on the news but recovered quickly. Interest rates remained mixed.

The Fed said the basic money supply, known as M1, rose to a seasonally adjusted $660.5 billion in the week ended May 26 from $658.8 billion in the previous week. M1 represents money readily available for spending and includes cash in circulation, deposits in checking accounts and non-bank travelers checks.

For the latest 13 weeks, M1 averaged $646.1 billion, an 11.6% seasonally adjusted annual rate of gain from the previous 13 weeks.

The Fed, in its attempt to provide enough money to stimulate non-inflationary economic growth, has said it would like to see M1 grow in a range of 3% to 8% from the fourth quarter of 1985 through the final quarter of 1986.

“It was another surprise on the upside,” said Ray Stone, chief financial economist for the investment firm Merrill Lynch.

Stone attributed the increase to households being more willing to hold their assets in cash now that interest rates have fallen. In addition, consumers would rather pay with cash than with credit cards, which still carry relatively high interest rates, he said.

The latest increase leaves the measure $14.4 billion above the Fed’s target, Stone said.

“That’s a large amount, but it’s clear that the Fed is not overreacting to M1, that they are perhaps watching it, that they are looking at it against the backdrop of the variety of other things,” he said.

In its other reports:

- The Federal Reserve Bank of New York reported that commercial and industrial loans at major New York City banks rose $182 million in the week ended May 28, compared to a decline of $1.497 billion in the previous week, bringing the total to $56.154 billion.

- The Federal Reserve said borrowings from the Federal Reserve System averaged $305 million in the two-week period ended Wednesday, up from $256 million in the previous two-week period. Borrowings from the Fed averaged $282 million in the week ended Wednesday, down from $329 million in the previous week.

- The Fed said total reserves averaged $49.214 billion in the two weeks, up from $48.401 billion in the prior two-week period.

- The Federal Reserve Bank of St. Louis reported that the monetary base was $245 billion in the two-week period ended Wednesday, up from $241.8 billion two weeks earlier.