The Federal Reserve System is socking away some extra cash for the year-2000, just in case depositors withdraw additional funds for the century date change.
The Fed is placing an unusually large order for new currency to increase its cash inventory from $150 billion to $200 billion, said Clyde Farnsworth, the Washington-based director of the Fed's reserve bank operations and payment systems.
Though Fed officials do not expect people to cash out their savings, they do think that customers will take out extra funds to cover groceries and expenses, as they do when hurricanes or blizzards threaten. For instance, people may worry that automated teller machines will refuse to dispense cash on and after New Year's Day in 2000, which will fall on a Saturday.
"We want to make sure we have enough currency available to meet consumer demand at the changeover," he said. "We do not believe the rational consumer would want to give up earning power by cashing out hard assets."
Industry experts applauded the move, adding they were not worried about its effect on the money supply or the economy.
"The Fed's actions if anything would help the economy," said Chip Dickson, analyst with Salomon Smith Barney. "If they couldn't meet the demand, then there would be a problem."
More than 100 banking and finance clients called the Gartner Group last week to ask if the Fed was indeed increasing its inventory, said research director Lou Marcoccio. Most said it was a positive move.
"We're very pleased they are taking this type of precaution," Mr. Marcoccio said. "It shows foresight."
Increasing the inventory or the amount of currency in circulation does not necessarily affect inflation unless consumers cash in stocks and other hard assets and then spend the money on things they would not normally buy, Mr. Farnsworth said. The money supply is defined as cash in circulation and in demand deposit accounts.
"Our monetary policy people feel strongly that this has no inflationary effect at all," he said.
Currently, there is about $460 billion in circulation, plus about $150 billion in the inventory. At the end of 1999, the Fed projects, there will be $697 billion in circulation and in the vaults.
The bulked-up inventory would also cover the expected increase in foreign countries's orders for dollars; they now hold about two-thirds of the cash in circulation.
The Fed always orders new currency from the Treasury Department to replace worn bills. The reserve bank normally increases its order by 5% to 6%. This year, however, it is ordering 11.4 billion bills, up 23% from its fiscal 1998 order. Also, to bulk up the inventory the Fed is ordering more notes in higher denominations, such as $50 and $100 bills.
The Fed will also have higher printing costs because of the year-2000 problem. The fiscal-1999 printing order is expected to come to about $458 million, up $100 million from this year's anticipated charge.
The Fed's inventory also rises every year, but this is a larger increase than normal, officials said. The inventory is split between vaults at the Fed banks and the Treasury's Bureau of Engraving and Printing.
To decide how much to increase inventory, the Fed spoke to economists, banks, and banking organizations. Officials also looked at historical data on cash demands during emergencies, such as floods and blizzards. They tried to judge what the demand would be if depositors withdrew two weeks' worth of cash.
The Fed has good reason to think people will want cash in their wallets. A May study from the Gartner Group showed that 49% of information technology professionals plan to either withdraw a one- to three-month supply of cash and/or make changes to their investments.