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Bond Prices Fall Further Despite $1.9 Billion Drop in Money Supply

February 8, 1985

NEW YORK (AP) _ Bond prices, already down for the day, fell further after the Federal Reserve Board reported that the nation’s basic money supply fell $1.9 billion in late January.

Economists noted that although the decline reported Thursday was larger than had been expected, it still left M1 above the Fed’s target. And they said traders are anticipating a large jump in next week’s figure.

Long-term bonds, down about half a point, shed another quarter point after the Fed released its report at 4:30 p.m. EST. The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.

The interest rate on three-month Treasury bills rose to 8.24 percent from 8.20 percent. Bond prices move in the opposite direction of interest rates.

The Fed said M1 fell to a seasonally adjusted $559.6 billion in the week ended Jan. 28 from $561.5 billion the previous week. M1 includes cash in circulation, deposits in checking accounts and travelers checks.

The Fed originally reported the previous week’s figure as $561.6 billion.

For the latest 13 weeks, M1 averaged $554 billion, a 5 percent seasonally adjusted annual rate of gain from the previous 13 weeks.

″It was certainly a welcome number,″ said Jerry Zukowski, an economist at PaineWebber Group Inc. ″However, it doesn’t do enough to alter the fact that M1 since early December has been exceptionally strong. The markets were not too impressed by it.″

Traders had expected a dip of $1.5 billion, he said.

David Jones, an economist with the government securities trading firm Aubrey G. Lanston & Co., said, ″Most importantly, I think there is already speculation that there could be a substantial increase of as much as $5 billion to $6 billion in the number we get a week from now.″

That increase would come from large government payments, such as Social Security payments, at the beginning of the month.

″If there is a substantial increase in the subsequent week, it could raise further speculation of a Fed move to tighten reserves and push interest rates higher,″ Jones said.

The Fed, which tries to provide enough money for sustained economic growth without fueling inflation, has said it would like to see M1 grow between 4 percent and 7 percent from the fourth quarter of 1984 through the fourth quarter of 1985, a slightly narrower growth range than the 4 percent to 8 percent of the previous year.

The latest figure leaves M1 $2.6 billion above the upper target.

″It’s not that important to the Fed that we’re over the top of the target. I think they’re more concerned with the rapid growth we’ve seen since early winter,″ Zukowski said.

″If we do not see a reduction in the rapid rate of M1 growth in the next month or so, the Fed is likely to adopt a more restrictive stance,″ Zukowski said.

Other indicators included:

-The Federal Reserve Bank of New York reported commercial and industrial loans at major New York City banks fell $236 million in the week ended Jan. 30, compared with a decline of $1.011 billion a week earlier.

-The federal funds rate, the interest rate on short-term loans between banks, averaged 8.59 percent in the week ended Wednesday, up from 8.45 percent the previous week.

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