Few statistics transfix Wall Street like the weekly figures on the nation's money supply that the Federal Reserve Board releases after the close of the stock market every Thursday afternoon.
Since a large jump in the money supply is considered a harbinger of future inflation and often signals a tightening in Fed monetary policy and higher interest rates as well, the market is understandably wary.
The outsized jumps in the money supply in recent weeks have indeed been followed almost immediately by Fed actions that have sent short-term rates climbing sharply.
However, Wall Street is also extremely perplexed -- along with the Fed - about why the money supply should be growing so rapidly at a time when economic activity appears to be dwindling.
Analysts are increasingly wondering whether the Fed actually knows what it's doing in trying to control the money figures. They are also questioning the wisdom of attempting to get a grip on the problem by sending interest rates soaring at a time when there is little growth in loan demand and considerable concern about the pace of economic activity.
The index of leading indicators has been down for three consecutive months. In August, industrial production was actually off by 0.5 per cent, the first drop since January when winter weather hit many manufacturers hard and was responsible for the decline.
Even inflation, as measured by the consumer price index, rose at a relatively scant 3.6 per cent annual rate in August and is expected to keep a low profile for the year. There has even been some talk that we may be entering a disinflationary period.
Yet contrary to economic logic, interest rates have been advancing as if the economy was gripped by a torrid boom.
Short-term rates, deliberately prodded upward by Fed actions, are up nearly 1.75 per cent since April. And the Commercial bank price interest rate, which has had a hard time just keeping up, is due another boost this week to 7.5 per cent, less than two weeks after the last increase.
But the ignores the fact that commercial and industrial loan demand has been slack with bankers furiously wining and dining corporate executives to stir up some loan business.
The reason for this contradiction is that the money suppply over the last six months has been significantly exceeding the upper bounds of the Fed's growth targets, rising for unexplained reasons growing at the highest rate in more than two years.
For the last six mongh, M-1. or the total of cash in circulation and checking account deposits, has been growing at a 9 pe rcent annual rate, well above the Fed's long-term target of 4-to-6.5 per cent.
In the third quarter it appears that M-1 will be up even more, at about 10 per cent. The broader money measure, M-2, which also includes savings deposits, is also growing at about 10.5 per cent in this quarter, above the Fed's 7-to-9.5 per cent target, but not exceeding it as much as M-1.
As Salomon Brothers economist Henry Kaufman noted, "this is the its long-term growth targets that first time since the fed established growth of 8-1 has exceeded the upper end of the target."
With the totals for the money aggregates already above the levels being aimed for. "The lates money stock level leaves very little room for further expansion during October," Kaufman added.
Despite Fed actions to restrain this growth -- which ened up sending the sensitive Federal Funds rate (charged by banks for overnight loans to other banks) up by about 1 per cent in the last month alone, with other rates following behind - the money supply has continued to surge.
The country's central bank is under pressure tokeep tightening from influential monetarist economists who believe that increases in the money supply beyond the pace of real economic growth eventually leads to higher levels of inflation.
Nobel laureate Milton Friedman, the leading economist of the Monetarist school, writing in this week's Newsweek said, "There is one and only one basic cure for inflation: slowing monetary growth. And he urged the Fed not to go bck on its oft-repeated resolve to bring down the case of monetary expansion.
But any actions that would further increase interest rates would certainly send new shudders thru financial markets and increase concern about the growing fragility of the economic recovery.
So the Fed is in a box, essentially of its own making, since it has locked itself into an approach to policy tied to the growth of the money aggregates.
"With the monetarists calling for additional firming while the Keynesians and others argue against such action, or even for an easier stance, the Fed has to hope that the growth in M-1 (for whatever reason) slows down quickly," according to this week's money market report from J. Henry Schroder Banking Copr "If it does not, the Fed runs the risk of an economic overkill and unwanted political problems."
The betting, however, is that the Fed will proceed extremely cautiously in new steps to tighten the screws that would raise interest rates even more, not the least because Fed chairman Arthur Burns' term expires in January. The feeling is that he would not like to completely jeopardize his already iffy chances for reappointment.
Significantly, Fed member Chas. Partee, in Congressional testimoney earlier this week, said the central bank has "by no means given up our views as to the ranges growth for the family of monetary aggregates that are appropriate in the longer run to the needs of the economy." But he questioned "how durable -- or meaningful" some of the recent increases have been.
"Our efforts to restrain the monetary expansion must therefore be judicious," he told the House Banking Committee's subcommittee on domestic monetary policy. "With the unemployment rate nationally still hovering around 7 per cent, we wouldn't want to contribute to conditions in credit markets that might imperil prospects for sustained economic recovery."
Burns, responding to a letter from House Banking Committee chairman Henry Reuss (D-Wisc.( about the money supply surge, echoed Partee's testimony and said the Fed has "deemed it wise to move cautiously and gradually" in trying to bring the aggregates back into line with the targets.