(Deceember 20) – “In trying to ensure a smooth run-up to the year 2000, U.S. Federal Reserve officials might be helping create the potential for economic bumps down the road,” writes John D. McKinnon in today’s Wall Street Journal.
“Thanks in part to Fed policies that are making money more readily available, businesses and individuals appear to be loading up on cash, much of it borrowed, some analysts say. That is helping to swell values on U.S. securities markets, heating up an already strong economy, some analysts believe. But what happens after the Y2K phenomenon has come and gone?
“Some analysts say that, at a minimum, the big bucks suddenly sloshing around in the economy could provide further encouragement for Federal Reserve officials to tighten monetary policy again after January, particularly if the increases continue.
“‘If the growth rates [in money supply] stay high, it will be another reason for the Fed to raise rates,’ says Marc Wanshel, vice president and financial economist for J.P. Morgan Inc. in New York.
“Don Hays, president of Hays Market Focus Inc., a Nashville, Tenn., newsletter and consulting company, thinks such a rate increase could bring on a significant money-supply contraction. In the past, such contractions have led to market corrections, he says.
“In November, the Fed’s broadest measure of money in the economy, the M3 supply, grew by about 18% on an annual basis, compared with 5.7% for the first six months of the year.
“Fed officials used to pay more attention to trends in money supply, believing that sharp increases, like the recent one in M3, could spur inflation. Now they rely less on monetarism, which had its heyday in the 1970s and 1980s. Many economists believe it has proved to be a less-than-reliable indicator of larger economic conditions. But some Fed officials still keep a close eye on money supply.
“Several specific measures of bank lending have soared even higher in recent weeks. According to the Fed, loans for securities, typically to dealers, have swelled by 24.5%, or some $28.1 billion, since the beginning of November. Lending tends to add to the money supply by creating new deposits.
“Oddly, Y2K seems to be pumping up the money supply for opposite reasons, according to some analysts following the issue.