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Money Supply Declines $800 Million in Week

December 05, 1986|Associated Press

NEW YORK — The basic U.S. money supply declined $800 million late last month, the Federal Reserve Board reported Thursday.

A companion report showed that the Fed had been supplying ample reserves to the nation's banking system, suggesting that the central bank had not tightened credit conditions as some interest rate watchers had suspected recently.

The credit markets gave an enthusiastic greeting to the reserve figures, and prices of key Treasury bonds improved on the news.

'Plenty of Reserves'

"It suggests that the Fed provided the system with plenty of reserves," said John Lilley, economist with the Redwood City, Calif.-based consulting firm Money Market Services Inc. "This implies that the Fed is still pursuing its very accommodative policy."

In an accommodative monetary policy, the Fed allows enough money into the economy to sustain growth without creating an inflationary condition in which too many dollars chase too few goods.

M1, the narrowest of the Fed's three main money measures, dropped to a seasonally adjusted $711.6 billion in the week ended Nov. 24 from $712.4 billion in the previous week.

For the latest 13 weeks, M1 averaged $700.8 billion, a 15.3% seasonally adjusted annual rate of gain from the previous 13 weeks. The Fed has said it would like to see M1 grow in a range of 3% to 8% from the fourth quarter of 1985 through the final quarter of 1986.

M1 represents money readily available for spending, including cash, checking account deposits and non-bank travelers checks.

Over time, money supply growth provides clues to Fed credit policy, according to financial analysts who track the trends.

These observers are divided on whether the central bank soon will try to enliven the lethargic economy by pursuing an even more generous credit stance. The Fed has the power to influence economic activity through its control of the availability of money, which affects the cost of money--interest rates.

Danger of Recession

Many analysts speculate that the economy is in danger of slumping into a recession unless the Fed drives down interest rates.

This theory has gained support from a spate of recent government reports that have shown vulnerability in key sectors, particularly in manufacturing.

The latest piece of discouraging news came Thursday, when the Commerce Department reported that U.S. factory orders tumbled 3.6% in October, the sharpest decline in more than six years.

Labor Department employment figures to be released today will be examined closely by the Fed, especially because they offer the first glimpse of how the economy performed in November.

"I think the employment report tomorrow will be a key indicator for the Fed. It will set the tone for a lot of other indicators we see released in December," said Harold Nathan, a vice president of Wells Fargo Bank in San Francisco.

In other reports:

- The Federal Reserve said bank borrowings from the Federal Reserve System averaged $242 million a day in the two-week period ended Wednesday, up from $213 million in the previous two weeks.

- The Federal Reserve Bank of New York reported that commercial and industrial loans at major New York City banks rose $54 million in the week ended Nov. 26, compared to a gain of $288 million a week earlier.

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