Nation’s Money Supply Declines $600 Million in Week

The Federal Reserve Board reported Thursday that the nation’s basic money supply declined $600 million in late July.

Even though the Fed has decided to virtually ignore the narrow money measure called M1, it has been hard to completely disregard M1’s surging growth this year.

Several private analysts were pleasantly surprised by the decline in M1 in the week ended July 28.

“It was refreshing to see M1 going down for a change,” said Sung Won Sohn, chief economist of Norwest Corp. in Minneapolis.

In a weekly report, the Fed said M1 fell to a seasonally adjusted average of $676.9 billion in the week ended July 28 from a revised $677.5 billion the week before. The previous week’s figure had initially been estimated at $677.7 billion.

For the latest 13 weeks, M1 averaged $666.5 billion, an 18.1% seasonally adjusted annual rate of gain from the previous 13 weeks.

One of the chief ways that the Fed exercises its influence over the economy is through its control over the availability of money. But Fed officials have apparently concluded that M1 is no longer a reliable indicator of economic activity.

M1 represents money readily available for spending, including cash on hand and in checking accounts and other accounts to which people have easy access. It also includes non-bank travelers checks.

In recent years, however, people and businesses have changed the way they hold their money, largely due to deregulation of interest rates. The result has been a shift of funds into accounts toted up for the M1 total. The central bank, in plotting its credit policies, has downgraded M1 in favor of broader monetary aggregates and overall economic trends.

The economic trends have been disappointing this year. A persistently poor economic performance increases the possibility that the Fed will ease credit conditions, many private analysts say.

Some analysts say that if the economy does not show signs of snapping out of its slump soon, the Fed might give it a nudge by cutting its chief loan rate, the discount rate, late this summer or early in the autumn.

The discount rate, currently at 6%, is the interest the Fed charges on loans to banks and savings institutions. Declines in the discount rate often cause other interest rates to move lower.

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 $182 million in the week ended July 30, compared to a decline of $485 million a week earlier.

- The Federal Reserve said the interest rate on federal funds, which are reserves banks lend each other overnight, averaged 6.36% in the week ended Wednesday, up from 6.32% in the previous week.

- The Federal Reserve said commercial paper outstanding nationally fell $108 million in the week ended July 30, bringing the total to $315.3 billion. In the previous week, commercial paper--corporate IOUs--declined $1.3 billion.

- The Federal Reserve said bank borrowings from the Federal Reserve System averaged $348 million a day in the week ended Wednesday, down from a daily average of $404 million in the previous week.

- The Federal Reserve said the banking system had net free reserves averaging $711 million in the two weeks ended July 30. That compared to free reserves of $356 million for the previous two-week period.