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.
  

