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Money Supply Climbs $2.7 Billion

Associated Press

The nation’s basic money supply rose by $2.7 billion in late May and early June, the Federal Reserve Board reported Thursday, but the increase had little effect on financial markets.

The gain in M1, which represents funds readily available for spending, kept the narrow measure of money growing far above the range set by the Fed in its attempts to stimulate non-inflationary economic growth. Despite the rapid growth, analysts say the central bank has been giving M1 less significance in its formation of monetary policy.

Illustrating that sentiment were remarks by Fed Governor Manuel Johnson, who told the Senate Banking Committee on Thursday that, while the Fed should not ignore M1 in setting monetary policy, it was looking more closely at factors such as interest rates, inflation, foreign exchange rates and indicators of economic activity.

Up to $663.2 Billion

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“The bottom line is that the market looks at what the Fed looks at, and the Fed seems to be looking more at economic growth and inflation instead of money growth,” said Harold Nathan, senior financial economist for Wells Fargo & Co. in San Francisco.

The Fed said M1 rose to a seasonally adjusted $663.2 billion in the week ended June 2 from $660.5 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 $648.5 billion, a 12.8% seasonally adjusted annual rate of gain from the previous 13 weeks. The Fed 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.

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Although analysts have said that continued rapid growth in M1 could draw more attention from the Fed, they also said they believed that more moderate growth in broader monetary aggregates known as M2 and M3 tended to outweigh the expansion of M1.

In Thursday’s report, the Fed said M2 averaged $2.6477 trillion in May, up from $2.6216 trillion in the previous month. M3 averaged $3.307 trillion in May, compared to $3.2888 trillion the month before. Both aggregates are growing within the ranges set by the Fed.

M2 is made up of M1 and such accounts as savings deposits and money-market mutual funds. M3 is the sum of M2 plus less-liquid accounts such as certificates of deposit in minimum denominations of $100,000.


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