NEW YORK — The nation's basic money supply fell $600 million in mid-February, the Federal Reserve Board reported Thursday. The late afternoon report had little effect on interest rates in the credit markets, where a powerful price rally was under way.
The slight decline put the Fed's M1 measure of the money supply at a seasonally adjusted $630.6 billion in the week ended Feb. 17, down from an adjusted $631.2 billion in the previous week. The previous week's figure originally was estimated as $630.7 billion.
M1 includes cash in circulation, deposits in checking accounts and non-bank travelers checks.
Expectations that low oil prices would help keep inflation subdued throughout 1986, and unconfirmed rumors that the Fed would follow the central banks of West Germany and Japan in soon lowering their interest rates, helped push some long-term government bond prices up by more than $20 for each $1,000 of face value and put yields at seven-year lows.
"We're just in the midst of a tremendous market rally less predicated on M1 than on oil prices at this juncture," said Ray Stone, manager of financial economics for Merrill Lynch Capital Markets.
Also, in recent weeks Federal Reserve Chairman Paul A. Volcker has stressed that, in determining monetary policy, the Fed would concentrate on a variety of factors, including the broader monetary aggregates known as M2 and M3.
M2 is made up of M1 and such accounts as savings deposits and money-market mutual funds. M3 is the sum of M2 plus less-liquid accounts such as certificates of deposit in minimum denominations of $100,000.
So far in 1986, all three of the aggregates have grown at rates well within the range set by the Fed. In its attempt to provide the economy with enough money to grow without high inflation, 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.
Analysts also noted that the week covered by the latest money supply report included the President's Day holiday, a Monday when banks were closed and corporate treasurers would have been unable to remove weekend deposits from non-M1 interest-bearing accounts, slightly depressing the M1 figure.
For the latest 13 weeks, M1 averaged $627 billion, a 9.2% seasonally adjusted annual rate of gain from the previous 13 weeks.
In other reports:
- The Federal Reserve Bank of New York reported that commercial and industrial loans at major New York City banks rose $69 million in the week ended Feb. 19, compared to a gain of $255 million a week earlier.
- The Federal Reserve said free reserves in the nation's banking system averaged $409 million in the two weeks ended Wednesday, compared to free reserves of $1.017 billion in the previous two-week period.
- The federal funds rate--the interest rate on short-term loans between banks--averaged 7.82% in the week ended Wednesday, down from 7.84% in the previous week.
- Member bank borrowings from the Federal Reserve System averaged $556 million a day during the week ended Wednesday, down from $632 million a day during the previous week. In the two weeks ended Wednesday, borrowings from the Fed averaged $594 million a day, up from $182 million a day in the previous two-week period.
- Total adjusted reserves of member banks averaged a seasonally adjusted $45.858 billion in the two weeks ended Wednesday, up from $45.718 billion a week earlier.
- 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 $238.4 billion for the two weeks ended Feb. 26, up from $237.8 billion a week earlier.