Money Supply Expands $2.4 Billion

NEW YORK —  The nation’s basic money supply, known as M1, shot up $2.4 billion in late August, its sixth consecutive weekly rise, the Federal Reserve Board reported Thursday.

The increase left M1 sharply above levels that the Fed has set for non-inflationary economic growth.

With a few signs beginning to point to a rebound in the economy, some analysts said they believed that the Fed would have to pay more attention to curbing the rapid growth of M1, something that would lead to higher interest rates.

“I think rates are going to start their movement upward very quickly,” said Thomas Thomson, chief economist at Crocker National Bank in San Francisco.

He described the latest surge in M1 as “a heap of money on top of an already tottering heap of money.”

Other analysts, however, said they did not expect any shift in Fed policy until there was further evidence of brisk economic growth.

14.5% Annual Rate of Gain

The Fed said M1 rose to a seasonally adjusted $608.4 billion in the week ended Aug. 26 from $606 billion in the previous week. M1, which includes cash in circulation, deposits in checking accounts and non-bank travelers checks, has risen $16.6 billion since July 15.

For the latest 13 weeks, M1 averaged $596.6 billion, a 14.5% seasonally adjusted annual rate of gain from the previous 13 weeks.

The Fed has said it would like to see M1 grow between 3% and 8% from the second quarter of this year through the fourth quarter.

Money Market Services, a private consulting firm in Belmont, Calif., calculated that M1 is now $13.3 billion above the upper limits of the Fed’s target and is growing at a 16.3% annual clip.

Interest rates were rising in financial markets before the latest figures were released by the Fed, with yields on 30-year Treasury bonds up nearly a tenth of a percentage point. After the money supply report proved to be within market expectations, yields on long-term Treasury bonds dipped from 10.49% to 10.47%, still higher than Wednesday’s late rate of 10.40%.

Analysts attributed the rising rates Thursday to reports suggesting an improving economy, including a record 71% increase in sales of new domestic cars in late August and of August sales gains by the nation’s large department store chains.

Thomson said that, once the Fed “sees a little more life in the economy, it can pay more attention to the money supply.”

If the Fed decides to clamp down on money supply growth, it would make credit scarcer, a move that would lead to higher interest rates.

Jeffrey Leeds, an economist at Chemical Bank in New York, said he believed that the Fed is unlikely to change policy until it has solid evidence that the economy is substantially rebounding from the sluggish 1.1% growth of the first half of the year.

The Fed “is still confronted by a paradox of very strong money supply growth on the one hand and what still seems to be a struggling economy on the other,” Leeds said.

Elliott Platt, an economist at Donaldson, Lufkin & Jenrette, said the rapid expansion of the money supply was having little impact on the bond market.

Platt said he expects the economy to continue to be weak, and he forecast that interest rates would hold steady for the next few weeks and begin falling in mid-October.

In other reports:

- The Federal Reserve Bank of New York said commercial and industrial loans at major New York City banks fell $2 million in the week ended Aug. 28, compared to a decline of $57 million a week earlier. It said commercial paper--or short-term corporate IOUs--outstanding nationwide fell $513 million in the week ended Aug. 28 after rising $414 million in the previous week.

- The Federal Reserve said bank borrowings from the Federal Reserve System averaged $1.02 billion in the week ended Wednesday, up from $401 million in the previous week. For the two-week period ended Aug. 28, borrowings from the Fed averaged $478 million, against $481 million in the previous two weeks.

- Total reserves of member banks averaged a seasonally adjusted $43.34 billion in the two weeks ended Aug. 28, up from $43 billion in the previous period.

- The Federal Reserve Bank of St. Louis reported that the monetary base, the seasonally adjusted total of member bank reserves held at Federal Reserve banks and cash in bank vaults and in circulation, was $232.4 billion in the week ended Wednesday, up from $229.4 billion a week earlier.