The nation's money supply fell by $3 billion in the week ended Feb. 24 to a level of $444.8 billion, the Federal Reserve reported yesterday.
The drop, larger than most analysts had expected, caused a surge in bond prices in late trading. Treasury bill rates fell about 0.2 percentage point on the news.
Federal Reserve officials have been hoping for such a decline in M-1, the measure of money that includes currency in circulation and checking deposits at financial institutions. Early in January, the level of M-1 shot far above the Fed's current target range, pushing up interest rates as the Fed tightened credit conditions to try to reduce its rate of growth.
The latest weekly figures indicate that most of the bulge is gone, and its origins are still unexplained. Most of the bulge came not in regular checking accounts but in those paying interest, such as NOW (negotiable order of withdrawal) accounts. Officials speculate that new uncertainties about the course of the economy and interest rates late last year caused many individuals to hold funds in a highly liquid form, causing the bulge in M-1.
Analysts have been puzzled by the surge in M-1 at a time when the economy clearly still was declining. The Fed's response to the surge in money growth was greatly tempered by the continuation of the recession.