FED DATA SUGGEST NO CHANGE IN MONETARY POLICY
New U.S. Banking data suggest the
Federal Reserve is guiding monetary policy along a steady path
and is not signalling any imminent change of course, economists
said.
    But they also said that if money supply growth remains
weak, as this week's unexpected eight billion dlr M-1 decline
suggests it may, this could influence the Fed to loosen its
credit reins and move toward a more accommodative monetary
policy.
    A Reuter survey of 17 money market economists produced a
forecast of a 600 mln dlr M-1 decline for the week ended June
8, with estimates ranging from a gain of one billion dlrs to a
decline of four billion. Instead, M-1 fell eight billion dlrs
to 745.7 billion dlrs at a seasonally adjusted annual rate.
    Coming on the heels of a 4.3 billion decrease in M-1 for
the week ended June 1, this means the nation's money supply has
fallen more than 12 billion dlrs in the past two weeks,
economists said.
    "M-1 has hit an air pocket of weakness," said Bill Sullivan
of Dean Witter Reynolds Inc.
    While M-1 may have lost its significance as an indicator of
economic growth, Sullivan said Fed officials might be concerned
the latest drop in M-1 means another month of sluggish growth
in the broader monetary aggregates, M-2 and M-3, which are seen
as better gauges of economic growth.
    Latest monthly M-2 and M-3 data showed that as of May, both
measures were growing at rates below the bottom of the Fed's
5-1/2 to 8-1/2 pct target ranges.
    If money growth does not accelerate, Fed officials,
concerned that this indicates economic growth is flagging,
could turn toward easier monetary policy, economists said.
    "Does this mean that the Fed abandons its current open
market position? No," Sullivan said. "But does this mean the end
of tightening for the time being? Definitely yes."
    Economists said average adjusted discount window borrowings
of 385 mln dlrs for the latest two-week bank statement period
were lower than they had expected. Most believed the Fed had
targetted a two-week borrowings average of around 500 mln dlrs.
    But they said that if it had not been for a large one-day
net miss in the Fed's reserve projections, the higher
borrowings target would probably have been reached.
    A drop in May U.S. Housing starts and continued weakness in
auto sales show key sectors of the U.S. Economy are lagging,
while a recent modest 0.3 pct gain in May producer prices has
helped dispel inflation fears, Slifer said.
    "If this continues, we can entertain the notion of Fed
easing at some point," he said.
    Other economists said the Fed would probably pay little
attention to weak money supply growth. "It has been a number of
years since M-1 has given good signs of what's going on in the
economy," one said. "I don't think M-1 shows that the economy is
falling apart and the Fed should ease."
    Economists agreed a stable dollar will continue to be a
prerequisite for any move by the Fed toward easier monetary
policy.
    They said the Fed is reluctant to lower short-term rates
for fear this would spur expectations of a weaker dollar and
higher inflation which would push up long-term yields and choke
off econmomic growth.
    But Sullivan said the dollar has been steady since late
April. "The Fed has to determine if this represents a
fundamental change for the dollar. If it does, then this gives
them more room to ease," he said.
 REUTER
