MONEY: Basic Supply Falls $400 Million : Money Supply Falls $400 Million

NEW YORK —  The nation’s basic money supply fell $400 million in late September, bringing its decline to $3.9 billion over the past two weeks, the Federal Reserve Board reported Thursday.

That drop, however, did not come close to wiping out the $21.9-billion upward surge of the previous eight weeks.

As a result, M1--the money supply measure of funds readily available for spending--remained well above the upper limits of the growth targets set by the Federal Reserve in its attempt to stimulate non-inflationary economic growth.

Analysts said that the Fed currently is paying more attention to the economy and the value of dollar than to the excessive growth in M1 and that, for the time being, the central bank will not push interest rates higher in an attempt to curtail M1’s growth.

$609.8 Billion

Some economists, however, said the Fed might not be able to keep ignoring M1’s growth and might decide to make credit scarcer later this year to prevent the economy from taking off in an inflationary burst.

The Fed said M1 dipped to a seasonally adjusted $609.8 billion in the week ended Sept. 23 from a revised $610.2 billion in the previous week. The previous week’s figure originally was reported as $610.4 billion.

The report was in line with analysts’ predictions and had no impact on interest rates in late trading in financial markets.

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.

But for the latest 13 weeks, M1 averaged $603 billion, or a 14.9% seasonally adjusted annual rate of gain from the previous 13 weeks.

Frank McCormick, an economist at Bank of America in San Francisco, said he believed that Fed policy-makers are worried about the inflationary implications of the sharp growth in M1 and would like to adopt a less accommodative policy.

“I think the Fed is probably leaning toward tightening but has not tightened yet,” he said.

McCormick said the Fed had been prevented from attacking M1’s rise because higher interest rates would work against an attempt by the United States and four other major countries to try to push down the value of the dollar. He added that higher rates also could cut short renewed economic growth.

But he said that, when Fed policy-makers meet again in November, they will turn their attention to slowing M1 because he believes that the dollar will no longer be a major consideration and that the economy will be growing at a brisk clip.

M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks.

In other reports:

- The Federal Reserve Bank of New York said commercial and industrial loans at major New York City banks fell $421 million in the week ended Sept. 25, compared to a gain of $589 million a week earlier. It said commercial paper--or short-term corporate IOUs--outstanding nationwide rose $2.27 billion in the week ended Sept. 25, after rising $2.83 billion in the previous week.

- The Federal Reserve said borrowings from the Federal Reserve System averaged $816 million in the week ended Wednesday, up from $608 million in the previous week. For the two weeks ended Sept. 25, borrowings from the Fed averaged $515 million, against $723 million in the previous two weeks.

- The Fed said total reserves of member banks averaged a seasonally adjusted $43.56 billion in the two weeks ended Sept. 25, up from $43.36 billion in the previous two-week period.

- The Fed said the nation’s banking system averaged free reserves of $128 million in the two weeks ended Sept. 25, compared to net borrowed reserves of $63 million in the previous period. Free reserves are a sign that funds are readily available in the banking system.

- 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 $232.1 billion in the week ended Wednesday, up from $231.9 billion a week earlier.