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Money Supply Rises

December 12, 1985

NEW YORK (AP) _ The nation’s basic money supply jumped $5.3 billion in early December, the Federal Reserve Board reported Thursday.

The latest increase in the money supply measure known as M1 - which represents funds readily available for spending - left it far above the targets set by the Fed for non-inflationary economic growth.

But analysts said the credit markets shrugged off the report. In fact, the interest rates on bellwether 30-year Treasury bonds fell slightly following the 4:30 p.m. EST release of the money supply report.

The Fed said M1 rose to a seasonally adjusted $626.1 billion in the week ended Dec. 2 from an adjusted $620.8 billion the previous week. The figure for the previous week had originally been reported at $621 billion.

M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks. For the latest 13 weeks, M1 averaged $614 billion, a 10.5 percent seasonally adjusted annual rate of gain from the previous 13 weeks.The Fed has said it would like to see M1 grow between 3 percent and 8 percent from the second quarter of this year through the fourth quarter.

Interest rates have been falling recently on expectations that the Fed will ease credit conditions to help renew growth in the sluggish U.S. economy, and that the federal budget deficit will shrink in the next few years.

President Reagan on Thursday signed a measure intended to eliminate the federal deficit by 1991. Balancing the federal budget would reduce the government’s need to borrow heavily in the credit markets to finance the deficit, a development which could help reduce interest rates.

In addition, recent drops in oil prices are regarded as a harbinger of subdued inflation, a condition which could allow the Fed to push interest rates lower without a fear of rekindling high inflation.

″When you have lower oil prices and you have lower commodity prices, that gives them leeway to allow the money supply to exceed the targets,″ said Lance Brofman, chief economist of the investment firm Donald Sheldon Inc. in New York.

Jeffrey Leeds, a financial economist at Chemical Bank in New York, said the credit markets ″completely shrugged off″ news of the surge in M1 because other figures indicated the central bank might soon cut the 7.5 percent discount rate, the rate the Fed charges on its loans to banks.

Leeds noted the Fed’s recent injections of reserves into the banking system through overnight repurchase agreements had been substantial. That was a sign interpreted by some Fed watchers as an indication the central bank wanted to push short term rates even lower than they had fallen in recent months, he said.

″In the past, discount rate cuts tend to be preceded by a somewhat more aggressive position on reserves,″ Leeds said.

Ray Stone, manager of financial economics for Merrill Lynch, Pierce Fenner & Smith, also noted the latest money supply report covered the week of Thanksgiving. Stone said the money supply may have been ″bloated″ because many corporate money managers skipped work the Friday after the holiday, leaving an unusually large amount of money in corporate checking accounts rather than in weekend investments.

The Fed also said two broader measures of the money supply increased in the latest reporting period. M2, which includes M1 plus accounts such as savings deposits and money market mutual funds, rose to an average of $2.5473 trillion in November from $2.5334 trillion in October.

M3, which is the sum of M2 plus less-liquid accounts, such as certificates of deposit in minimum denominations of $100,000, rose to an average of $3.1906 trillion from $3.1773 trillion in October, the Fed reported.

In other reports:

-The Federal Reserve Bank of New York reported commercial and industrial loans at major New York City banks rose $1.097 billion for the week ended Dec. 4, compared with a decline of $180 million a week earlier.

-The Federal Reserve said bank borrowings from the Federal Reserve System averaged $2.425 billion in the two-week period ended Dec. 4, up from $656 million in the previous two-week period.

-Borrowings from the Fed averaged $163 million in the week ended Wednesday, down from $1.083 billion the previous week.

-The Federal Reserve said total adjusted reserves of member banks averaged $45.030 billion in the two weeks ended Dec. 4, up from $44.127 billion in the prior two weeks.

-The Federal Reserve said net borrowed reserves totaled $1.362 billion for the two weeks ended Dec. 4. That compared with free reserves of $245 million for the previous two-week 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 $236.3 billion in the week ended Wednesday, up from $234.2 billion a week earlier.

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