The Federal Reserve Board yesterday reported the nation's money supply jumped an unexpectedly large $4 billion in the week ended Dec. 2, sending government bond prices sharplydown.
Financial market analysts had worried all week that the Fed would not continue to ease credit conditions to combat the recession. As a result, interest rates rose modestly. The $4 billion increase in the money supply measure M1-B reinforced those fears, driving down the price of some bonds by $10 or more. When interest rates go up, bond prices move down.
M1-B, which includes currency in circulation and checking account deposits at financial institutions, rose to a seasonally adjusted level of $439.9 billion. A broader measure of the money supply known as M2, which also includes savings deposits, money-market mutual fund shares and some other items, jumped $24.6 billion in November to a seasonally adjusted $1.82 trillion, the Fed said.
M1-B remained below the central bank's official target range in November, but M2 was well above the upper limit of its range.
Meanwhile, Fed Vice Chairman Frederick Schultz told a House Banking subcommittee that tight money policies have contributed to high interest rates and therefore to the recession. "I don't think that there is much question that a major factor in this recession are the very high interest rates that we've seen," he said.
Schultz, however, said that excessive reliance on tight money to fight inflation has meant that some interest-sensitive sectors of the economy, including autos and housing, have been hit much harder than others. He said "we need a more balanced program" with more restraint on the fiscal policy side to relieve what he called "the great strain" on those hard-hit industries.
Rep. Henry Reuss (D-Wisc.) told the same group that the Fed's money growth targets for 1982 "could well portend a major tightening of monetary policy in the year ahead."
Reuss said that the stimulus from the 10 percent personal income tax cut scheduled for July 1 could conflict with the monetary targets, resulting in another surge in interest rates. Reuss strongly backed a resolution before the subcommittee calling on the Fed to raise its money growth targets for next year.
In San Francisco, Leland S. Prussia, chairman of BankAmerica Corp., parent of the Bank of America, the nation's largest commercial bank, said in an interview with the Wall Street Journal that he expects the recession to be worse than most forecasters have predicted. He cited huge prospective budget deficits and the basic weakness in autos and housing as reasons.
Prussia also was highly critical of the Reagan administration's economic policy package. He said he "never believed" that cutting taxes and government spending would reduce inflation and interest rates while at the same time stimulating private investment.
"It isn't in the cards," Prussia declared. "As a matter of fact, I couldn't believe we were being sold this."