All three measures of the nation's money supply registered strong growth in November after a four-month period of much smaller increases, the Federal Reserve reported yesterday.
The weakness in money growth coincided with the slowdown in economic growth and provoked sharp criticism of the Fed by Treasury Secretary Donald T. Regan. Even with the stronger showing for November, Regan, who has focused almost entirely on changes in the most narrow measure of money, M1, may renew his complaints because M1 dropped by an unusually large amount, $7.1 billion, in the week ended Dec. 3, according to the Fed report.
The decline was about twice as large as financial analysts generally had expected. On the basis of those expectations, Regan on Wednesday criticized the Fed for allowing it to occur, saying that the central bank's monetary policy stance is too tight.
But some analysts believe the money figures for November indicate that the easing of Fed policy that has taken place since August -- during which some short-term interest rates have tumbled nearly three percentage points -- is beginning to bear fruit.
M1, which includes currency and travelers checks in circulation and checking deposits at financial institutions, rose at an 8.6 percent annual rate in November after showing no growth between June and October. Even so, because of a slight decline in October, M1 remained below the 6 percent growth track the Fed had targeted for the September-December period.
Analysts said they expect at least half of the $7.1 billion drop in the week ended Dec. 3 to be reversed when figures are available for the Dec. 10 week. And while most of them anticipate continued M1 growth for all of December, the latest weekly number "puts M1 in a hole it will have to climb out of," acknowledged one analyst.
But there is considerable skepticism in some quarters about what M1 is indicating. The broader money measure, M2, which includes all of M1 plus savings and small time deposits at financial institutions, most money market mutual fund shares and some other items, rose at a 14.9 percent annual rate in November. Similarly, M3, which includes M2, large time deposits and other items, went up at a 15.9 percent rate.
Economist Scott E. Pardee of the Discount Corp. of New York, a major government securities dealer, noted the stronger growth of the broader money measures in a recent speech in Houston. "Once again we are seeing a shift of funds from non-interest bearing accounts to money market mutual funds and money market deposit accounts to capture the higher rates some of those placements can now command," he said. "So whereas the slow growth of M1 makes a more accommodative Federal Reserve policy possible, it does not provide a compelling case for further ease."
The Fed's policy-making group, the Federal Open Market Committee, will meet next week to set a policy course for most of the next two months. The somewhat less rapid growth of M1 than the broader money measures, and the sharp drop in the latest week, may encourage some members of the committee to push for a further easing of policy in order to help ensure that the economic slowdown is reversed. Vice Chairman Preston Martin has said publicly that he believes there are grounds for such a move.
But other FOMC members may resist any further easing at this time, given the much healthier increases in all the money measures in November and some other indications that economic growth may be picking up. For instance, last week the Labor Department said that the unemployment rate fell from 7.4 percent to 7.2 percent in November and the number of hours worked went up. Yesterday's Commerce Department report that retail sales surged 1.8 percent last month was another strong sign of an economic pickup.