Moderation in tax refunds hints interest-rate ease-up

Federal Reserve Board-watchers on Wall Street added a new technique to their avocation last week: watching the US mails.

The postal observers reasoned that it was the peak season for income tax refunds. These refunds, combined with other seasonal factors, would pump up the money supply--clouding the short-term interest rate outlook.

But the postman held a few surprises. And, as William Sullivan, senior vice-president of the Bank of New York, says, ''Individual income tax refunds are not growing as rapidly as envisioned.'' While some observers expected a gain in refunds on the order of $12 billion to $15 billion, Mr. Sullivan notes, ''It does not appear now that the refunds will grow that significantly.'' In fact, with half of the refund period over, returns are up only 3 to 4 percent over last year. In the most recent mailing, on April 2, analysts detected no unusual increase.

The fact that tax refunds are not rocketing through the mails, as analysts had originally expected, is one of the reasons Wall Street interest rate mavens are now a little more optimistic about the course of the rates over the next month. Another reason, Sullivan notes, is the fact the Fed has maintained a very tight monetary policy--precluding any need for monetary action to counter what will probably be a seasonal bulge in money supply in April.

Over the past 10 weeks, in fact, the nation's money supply has actually contracted and is now at about the same level as it was in January. Sullivan comments, ''It underscores the measurement problems of the Fed.''

In part because of these measurement problems, Larry Wachtel, an analyst at Bache Halsey Stuart Shields Inc., notes that estimates of money supply growth for the month of April are starting to sag. This week, for example, the supply is expected to grow $2 billion--down from a previous estimate of $6 billion. ''The theory was that people would put their tax refund or social security payments into their checking account,'' Mr. Wachtel says, ''and now it looks like that won't be happening to the degree Wall Street expected.''

In fact, Sullivan says many of the Street's Fed-watchers are scaling back their estimates of money supply growth for the month. ''The total average in April may be only $5-6 billion,'' he says, as opposed to some original estimates of $10 billion to $20 billion. For the week ended March 31, the government reported a $900 million increase in the money supply.

Sullivan estimates that if the money supply fails to surge in April, short-term interest rates will begin to fall. By May, short-term rates could be down about 150 basis points, that is, about 11/2 percent. Thus, the Fed funds rate would fall to about 121/2 percent and the prime interest rate to about 15 percent. A resulting rally in the short-term bond market could spill over to the long-term bond market, dropping yields on Treasury bills 50 to 75 basis points to about the 13 percent level.

The main drags on the long-term market are a large corporate calendar and the expectation that the government will also be an active borrower. Should Congress reach a compromise on the budget, lowering government spending levels or raising revenues with some form of new tax, analysts expect this could also help the long-term bond market. As Wachtel notes, ''With the possibility of a $ 150 billion deficit, people are telling Congress, 'We don't trust you.' If the deficit is significantly reduced, the premium in the bond markets would be reduced.''

''Dear Congressman:

''Do you really want to know how Wall Street feels about the budget? . . .

Oppenheimer & Co., acting on comments from senior officials in Washington that they would like to know what major institutional investors were thinking, polled 93 executives of financial institutions controlling over $540 billion in assets.

Despite several recent polls showing the President losing some support in the busness community, 87 percent of the respondents, which included pension managers and bank trust and mutual fund officers, said they supported the President's economic program. At the same time, they didn't expect the program to work miracles overnight, with 84 percent of the fund managers expecting the program to take two to three years before lowering inflation long term and reducing government spending significantly. Despite the expectation that it would take this long for the President's program to work, 59 percent of the managers expected Congress and the administration to overreact to the recession, increasing spending by 7 to 10 percent. And some 94 percent of those polled felt there was a lot of waste in defense spending that could be squeezed out.

Interpreting the data, Stephen Robert, the Oppenheimer president, said fund managers have resorted to looking for ''windows,'' or short-term periods, in which to trade stocks, perhaps because of oversold conditions and their skepticism about Washington, instead of looking at stocks as long-term investments. As fund managers as a group spot these windows, volume accelerates. With such pessimism around, Mr. Robert notes, fund managers tend to get cautious--often the sign of a bottom in the market.

The market continued its steady climb out of the basement last week. The Dow Jones industrial average climbed for the third week in a row, adding 4.37 points to close at 842.94, its highest level in 21/2 weeks. Volume accelerated on Thursday, the last day the market was open before the Good Friday holiday. Among the actives, General Foods was higher, as were some of the energy and high-technology stocks.