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Why The Fed May Redefine The Money Supply


Economic Trends

WHY THE FED MAY REDEFINE THE MONEY SUPPLY

It's no secret that banks have responded to the competition from brokerage firms and other financial institutions selling mutual funds to the public by offering such funds themselves to their depositors. What's underscored by a recent Federal Reserve survey of 56 of the nation's largest banks, however, is the extent to which the banks are now committed to this new line of business.

Most of the banks surveyed now keep a full-time mutual-fund sales staff at more than 20% of their branches. Nearly all offer both proprietary funds (managed by the banks themselves) and nonproprietary funds. And most say that at least one-third to two-thirds of their sales are funded by their own deposits.

Many experts blame the sluggish growth of the money supply in recent years on the growing tendency of savers to shift money out of bank certificates of deposit, which are included in the money supply, into mutual funds, which are not. With so many banks now avidly abetting the process, says economist Robert V. DiClemente of Salomon Brothers Inc., "the Fed may be approaching a point where it will have to redefine the money supply to restore its usefulness as a link to economic activity."GENE KORETZ


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