To the surprise of most analysts, including those at the Federal Reserve, the nation's money supply took another sharp jump in the first two weeks of November, the Fed announced yesterday.
The latest figures could lead to further increases in interest rates as the Federal Reserve continues its agressive efforts to tighten credit conditions to get the money supply back within the Fed's target range.
Yesterday Citibank, the nation's second-largest bank, joined most other major banks by raising its prime lending rate to 17 percent.
The measure of the money supply known as M1-A rose $1.8 billion in the week ended Nov. 12, to $390.2 billion, the Fed reported. Equally important, it revised the number for the previous week showing that M1-A, which includes currency in circulation and checking account deposits at commercial banks, rose $1.9 billion instead of the $700 million first estimated.
A broader money supply figure, M1-B, which also includes other checking deposits, such as NOW accounts, at commercial banks and thrift institutions, rose $2.6 billion in the week ended Nov. 5 and another $2.4 billion, to $415.5 billion, in the latest week, the Fed said.
Federal Reserve officials acknowledge that these latest increases make it all but impossible for the Federal Resserve to keep the M1-B within its target range for the fourth quarter of the year, the upper bound of which called for 6 1/2 percent growth between the final three months of last year and this quarter. Similarly, the officials expect M-2 -- which includes M1-B, small time deposits at banks and thrift institutins and some other items -- to end the year above the 9 percent upper bound of its target range.
Kevin Hurley of Chase Econometrics Associates and Allen Sinai of Data Resources Inc. were among the analysts surprised by the unusually fast growth in the monetary aggregates at a time other indicators suggest the economy is expanding much more slowly than it did between July and October.
The latest moves by the Fed to slow the rapid growth of money culminated Nov. 14 in a rise in the discount rate -- the interest rate the Fed charges financial institutions when they borrow directly from it -- to 12 percent with a 2 percentage point sur-charge for frequent borrowings by large banks.
"Like the similar move of last March, this latest turn by the Federal Reserve probably comes at a time when the economy already has begun to sink from the cumulative effects of the unprecendented rises in . . . interest rates since mid-June," Sinai said.
Just as the unexpectedly swift rebound in the economy during the summer led to a rapid expansion of the money suppky, the analysts expect slower economic growth to reduce it.
The very large jump in interest rates, which has all but dried up home sales in some parts of the nation and is beginning to put a crimp in new car buying as well, has convinced skeptics that the Federal Reserve, as Chairman Paul Volcker reiterated in congressional testimony last week, fully intends to try to hit its money supply targets even at the risk of aborting the recovery from recession.
Fed officials, however, remain concerned that they have had to tighten up so much now that, like last spring, the economy and the money supply both will begin to decline again, though probably not nearly as steeply as they did then. bThus, the worry is not that the money supply will not be brought under control but that in the process its growth -- and that of the economy -- will continue their roller-coaster ride of the last year.
Until the latest revisions in the Nov. 5 figures, officials were taking some comfort in the fact that the money-supply level was no higher that week than it had been five weeks earlier. Despite the revisions, most analysts believe interest rates are at or very close to their peaks. At the same time, they do not expect rates to begin to decline until it becomes completely clear that the Fed has a handle on the money supply once again.