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The Fed's Y2 K Hangover

Economic Trends

The Fed's Y2K Hangover

Why it could jack up rates

Remember the money supply? Although Federal Reserve policymakers pay little attention to its fluctuations these days, many economists are casting a wary eye on the latest money numbers--especially the broad M3 monetary aggregate, which includes currency, checking accounts, money-market funds, and savings deposits, as well as large CDs and other bank liabilities.

One concerned observer is Paul L. Kasriel of Chicago's Northern Trust Co., who notes that in the eight weeks ended Dec. 20, M3 growth soared to a 22% annual rate, the highest in at least 15 years, while bank-credit growth hit a 23.4% annual clip. This dual pattern, he says, suggests that "Fed Chairman Alan Greenspan has been inadvertently spiking the monetary punch rather than taking the punch bowl away."

The conventional wisdom, observes Kasriel, is that the explosive growth of M3 is basically a Y2K phenomenon, reflecting the public's desire to hold a lot more currency as the calendar flipped to the year 2000. But while people's demand for currency did shoot up at a 21.3% rate in recent months, he points out that most folks obtain cash by running down their checking and savings deposits, which are also part of the M3 money supply. "Changing the composition of M3," he says, "doesn't necessarily increase its growth rate."

To be sure, money growth could accelerate if the public's currency withdrawals ate into the banks' required reserves or if the banks aggressively increased their holdings of vault cash to meet anticipated public demand. In fact, the Fed did add reserves to the banking system in recent months to offset such needs and keep the banking system on an even keel.

Such defensive operations alone, however, are hardly a reason for monetary growth to explode. From Nov. 1 to Dec. 20, as M3 before seasonal adjustment shot up $245 billion, its currency component rose only $23 billion and surplus vault cash just $13 billion.

Thus, the key factor behind M3's heady growth appears to be the Fed's accommodation of the surge in bank lending--which has exceeded even the soaring bank loan growth in late 1998, when credit market problems in the wake of the Russian default and hedge-fund debacles forced corporations to turn to the banks for funds. And this time around, notes Kasriel, far faster growth is being posted by consumer and real estate loans than by commercial and industrial loans. Even margin debt has been skyrocketing.

In sum, Kasriel thinks the recent explosion in M3 has more to do with strong credit demands in the economy than with Y2K concerns. And that suggests that the Fed will be far more aggressive in pushing up rates in coming months than many people expect.By Gene KoretzReturn to top

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Hazardous to Your Career

The risks of taking unpaid leaves

Millions of Americans have availed themselves of the Family & Medical Leave Act of 1993, which permits employees to take unpaid leaves of up to 12 weeks for family or medical reasons. According to a study in the current issue of the Academy of Management Journal, however, such leaves may entail significant risks for managers.

In the study, Michael K. Judiesch and Karen S. Lyness of the City University of New York's Baruch College compared the progress of 523 full-time managers of a big financial-services company who took leaves in the early 1990s with that of their peers from 1993 to mid-1995. Adjusting for age, gender, education, and job factors, they found that leave-takers were 18% less likely to be promoted than non-leave-takers and received 8% less in salary hikes.

The median length of leave was less than two months, and though some lasted much longer, the study found that the length of absences did not affect penalties. (Multiple leave-takers, however, were more heavily penalized.)

Not only did leave-takers tend to receive lower job performance ratings for the year in which they took time off, but they also received fewer promotions and smaller salary increases than their peers with similar low ratings. Still, a third of leave-takers did subsequently receive promotions.

Whether they will eventually catch up with their peers, however, is uncertain. The researchers note that those managers receiving early promotions tend to enter an especially fast track, rising more rapidly to higher levels.By Gene KoretzReturn to top

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