Money Supply Drops $1.8 Billion in Late June
The nation’s basic money supply fell $1.8 billion late last month, ending a nine-week string of increases, the Federal Reserve Board reported Thursday.
The drop in the narrow money measure known as M1 might comfort the central bank as it weighs whether to relax credit policy in a bid to enliven the lethargic economy, some analysts said.
The weekly report showed that M1 fell to a seasonally adjusted average of $666.4 billion in the week ended June 23 from a revised $668.2 billion a week earlier. The previous week’s figure was originally estimated at $668.5 billion.
James L. Cochrane, chief economist of Texas Commerce Bancshares in Houston, said the decline “may permit the Fed to be less worried about the explosive growth this year in M1. They can cast their gaze elsewhere.”
For the latest 13 weeks, M1 averaged $655.1 billion, a 15% seasonally adjusted annual rate of gain from the previous 13-week period.
The Fed, as part of its mission to provide enough money to support non-inflationary economic growth, has said it would like to see M1 expand in a range of 3% to 8% from the fourth quarter of 1985 through the final quarter of 1986.
M1 represents funds readily available for spending. It includes cash in circulation, deposits in checking accounts and non-bank travelers checks.
John Doyle, an economist with Money Market Services in Redwood City, Calif., was reluctant to draw any implications on Fed policy from the latest week’s behavior of M1.
Monetary policy decisions are determined on the basis of broad domestic and international economic trends, said Doyle. He said he believes that the Fed attaches relatively little significance to M1.
A drop in the nation’s unemployment rate did little to dispel the notion that the economy is anemic and needs a dose of stimulation in the form of lower interest rates.
“I think there will be a discount rate cut by the Fed sometime this month or perhaps by early August,” said Cochrane, making a prediction shared by a growing number of analysts. The discount rate, now at 6.5%, is the interest that the Fed charges on loans to financial institutions.
The Labor Department reported that the civilian unemployment rate fell to 7.1% in June from 7.3% in May.
Some analysts interpreted the decline as the first piece of promising economic news in some time after recent reports suggesting widespread weakness, particularly in manufacturing and foreign trade.
But others found little evidence of improving economic conditions in the report. They pointed to the department’s survey of payrolls at non-farm businesses, which showed that employment declined.
Even though the payroll tally was depressed by labor strikes, the job losses implied that economic growth remained too low to produce much improvement in the labor market.
The lackluster job report will come under scrutiny by the Fed’s policy-making arm when its members meet to set a credit policy course for the summer. The Federal Open Market Committee is scheduled to hold its next regular meeting on Tuesday and Wednesday.
In other reports:
- The Federal Reserve Bank of New York reported that commercial and industrial loans on the books of major New York City banks rose $788 million in the week ended June 25, compared to a decline of $314 million a week earlier.
- The Federal Reserve said commercial paper outstanding nationally--corporate IOUs--fell $1 billion in the week ended June 25, bringing the total to $316.2 billion. In the previous week, such paper rose $5.2 billion.
