The most closely watched measure of the money supply continued its rapid rise with another $1.7 billion increase in the week ended Feb. 18, the Federal Reserve reported yesterday.
The rapid rise in the money supply is worsening the central bank's dilemma over how to deal with the surging U.S. dollar, analysts said.
Meanwhile, both short- and long-term money market interest rates also moved up, with large certificates of deposit due in 90 days jumping about one-fourth of a percentage point to 9 percent yesterday. The key federal funds rate -- the interest rate banks charge one another when they loan reserves -- rose above 8 3/4 percent.
A separate Fed report also indicated that financial institutions in the two-week period ended Wednesday borrowed about $570 million from the Fed itself for seasonal needs and to meet reserve requirements. That was about $200 million more than in the two preceding two-week reserve maintenance periods and would be consistent with the increase in the federal funds rate.
The jump in M1 -- which includes currency in circulation and checking deposits at financial institutions -- to a level of $569.3 billion left it nearly $16 billion higher than its average for the fourth quarter of last year, the base the Federal Reserve used in setting its 1985 money targets. The latest week's figure means that M1 is already about 40 percent of the way toward the upper limit of the 4 percent-to-7 percent range the Fed set for its expansion for all of this year. The measure is 70 percent of the way to the lower limit.
This rapid growth has left the Fed in a serious dilemma, according to financial analysts. Overt action to rein in the money supply would involve higher interest rates, which could send the already strong U.S. dollar to still loftier heights at the same time central banks around the world are intervening in currency markets to knock it down, the analysts said.
Nevertheless, there are signs that the Fed about the third week in January not only ended the progressive easing of monetary policy that began last summer -- as Federal Reserve Chairman Paul A. Volcker told Congress last week -- but that it also has conducted its recent day-to-day money market transactions in ways intended to raise short-term rates.
William C. Melton, senior economist with Investors Diversified Services of Minneapolis, said that the Fed has been supplying the reserves needed by the banking system in recent weeks in such a way as to raise the key federal funds rate from about 8 1/4 percent in mid-January to about 8 3/4 percent now.
Volcker, in his testimony to the Senate Banking Committee last week, said explicitly that the central bank has not begun to "tighten" policy. But in the hair-splitting semantics of the Fed, that does not rule out actions that could produce somewhat higher market interest rates or cause institutions to have to borrow more money directly from the Fed.
Salomon Brothers economist Henry Kaufman noted in his most recent weekly "Comments on Credit" that the Fed has been so generous in providing reserves to the banking system that it "raises a serious question about how much caution is being exercised. While the Fed is no longer moving toward greater ease, it has not significantly reduced the degrees of accommodation that resulted in a 10.6 percent rate of growth in M1 from the end of October.
"Consequently," Kaufman continued, "market jitters about the Fed's intentions are likely to contribute to further near-term increases in both short- and long-term interest rates. The Fed will probably tolerate this development to a modest degree, suggesting that the federal funds rate will drift up toward 9 percent before the end of March."
Another analyst, Frederick Breimyer of Boston's State Street Bank and Trust Co., also expects the funds rate to be at the 8 3/4 percent level or possibly higher.
"The Fed does not want to do anything that could be. interpreted as a full-scale tightening," Breimyer said.