The money market mystery is still unsolved

Despite the latest benchmark revision of the nation's money supply numbers, based on periodic reports from a wider sample of banks, the unexpected lack of growth that began last October is continuing. And interest rates are also still edging downward.

For the week ending Jan. 31, M-1 -- the total of currency in circulation and checking accounts at commercial banks -- fell from a revised $358.0 billion the previous week to $357.4 billion. M-2, which is M-1 plus time deposits at commercial banks, fell from $874.0 billion to $873.9 billion. Many economists are puzzled that the monetary numbers show such slow growth at a time the economy is still expanding strongly.

Meanwhile, the Federal Reserve staff formally proposed that the definitions of the various M's be changed to take into account changes in recent years in the way in which people can hold "money."

Where once checking account deposits at commercial banks were the only non-currency form of "money" that people treated just as if it were money, now there are many other assets that can be used the same way -- share draft accounts at credit unions, negotiable order of withdrawal (NOW) accounts at some banks, and numerous savings accounts at banks and thrift institutions against which checks can be written.

There are similar changes involving large time deposits, such as $100,000 certificates of deposit, that make other definitions of some of the monetary aggregates obsolete, the staff said in an article in the January Federal Reserve Bulletin.

"The definitions proposed by the board staff... reflect recent developments by grouping together similar kinds of deposits at all depository institutions," the article said.

Basically, the proposed definition of M-1 "is a more comprehensive measure of balances of domestically related transactions." M-2 would be broadened to include M-1 and savings deposits at all depository institutions instead of just at commercial banks.

M-1 plus, which now consists of M-1 and savings deposits at commercial banks and checkable deposits at the thrifts, would be redefined to include only the new M-1 and savings balances at commercial banks.

M-3, which has included the present M-2 and deposits at the thrifts, would become a very broad catch-all aggregate. The Fed staff would redefine it to include the new M-2 plus all time and savings deposits regardless of size at all depositary institutions.

The present measures, M-4 and M-5, which are the only ones including large negotiable CD's -- those of $100,000 or more -- would be dropped. Such CD's would be part of the new M-3.

The new M-1 actually would be smaller than the present M-1 despite the fact that it would include more types of deposits. That happens because the staff recommends that checking accounts of foreign commercial banks and official institutions be excluded.

The purpose of keeping track of the monetary aggregates in the first place is to help the Fed in setting policies to influence the economy. Since those foreign balances are unlikely to be used to purchase goods and services like those of U.S. citizens, the staff would leave them out.