The nation's money supply rose $7.1 billion in the week ended April 7, one of the largest week-to-week increases ever in the highly volatile figure, the Federal Reserve reported yesterday.
Financial market experts had been expecting a large jump because of a number of technical factors, including what is probably a faulty seasonal adjustment for the week in question, and some of them expect the figure to fall somewhat in coming weeks. Nevertheless, the increase could block any move in the markets toward lower interest rates, at least until it becomes clearer whether the Federal Reserve will choose to tighten credit conditions in response to the new bulge in money growth.
"We would look for some modest reversal," said William V. Sullivan Jr., senior vice president at the Bank of New York. "But we're very, very cautious because this gain is of such magnitude that it's almost assured the April money supply will be above targets for the fourth month in a row."
David M. Jones, an economist at Aubrey G. Lanston & Co., a New York bond dealer, said the increase was "substantially greater than the $4 billion to $5 billion that had been expected." tables on D10
Jones said early payment of Social Security and other pension checks, which were in checking balances over the weekend in the month, was a major factor in the large increase in M-1. "Also, people had begun to build up money balances to pay their taxes. Finally, although it wasn't a strong factor, tax refunds could have contributed to the jump," he said.
The Fed, in an effort to de-emphasize the weekly money supply numbers, plans to stop publishing seasonally adjusted weekly figures for M-1, which is comprised of currency in circulation and checking accounts at financial institutions. Instead, the central bank will publish a new seasonally adjusted four-week average for M-1.
Federal Reserve officials stress that they pay far more attention to changes in the four-week averages, which are less volatile. For instance, even with the latest $7.1 billion increase in M-1 to a level of $453.6 billion, the average for the latest four weeks is $448.8 billion, up a modest $1.1 billion from the average for the four weeks ended March 10.
Because of this sort of analysis, Jones and other observers believe that, although the Fed "will be on guard" with M-1 above its target range, it will wait for additional data before initiating a tightening move that would mean higher interest rates.
Meanwhile, despite the still deepening recession, business loan demand at major banks jumped $1.58 billion in the week ended April 7, almost identical to a revised increase of $1.59 billion the previous week. Faster loan growth typically is associated with a rapid buildup in borrowers' money balances.
Sullivan said that, unlike the previous week, however, commercial paper--unsecured corporate IOUs--not only rose, but did so by $2.3 billion, a record for the first week of April. "As long as business credit demand remains this strong, it's doubtful you'll get any major washout in M-1 or any meaningful drop in short-term rates," he said.