M2 Growth May Be Slow, a Fed Chief Says

WASHINGTON - Robert Black, president of the Richmond Federal Reserve Bank, said the Federal Reserve must stay alert to the possibility that recent growth in the money supply is too slow.

"It's always possible that [the money supply data] may be signaling weaker economic activity than we would like," he said in an interview.

But he added that some of recent weakness in the key M2 aggregate was due to the transfer of funds out of small time deposits and money market deposit accounts into stock and bound mutual funds.

Explainable in Part

"It's just people restructuring their portfolios to some degree," Mr. Black said. But he said this cannot explain all the weakness in M2, which is growing below the Fed's target of 2.5% to 6.5% annually.

"If the aggregates remain at the slow rate at which they've been growing and there weren't good explanations for it... I'd be prepared to ease," Mr. Black said.

"If there were some real weakness [in money growth] for some time and there was no explanation for that, I would certainly want to ease," he added."

Mr. Black said he thought the economy is recovering slowly, but added he would like to see "a few more signs" to confirm this.

Awaiting Employment Figures

He said he is looking ahead to the Sep. 6 release of August unemployment data for signs that the labor market has improved. Nonfarm employment has fallen for the last two months, raising fears that the economy may be slipping back into recession.

"I wouldn't necessarily think that's a harbinger of worst times to come," the Richmond Fed president said.

A downward revision in second-quarter gross national product, announced Wednesday, was mainly due to changes in consumer spending and business inventories. Mr. Black said he was surprised by the downturn in consumer spending, but he said the cut in inventories "argurs for strength later on,"

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