FED DATA PROVIDE NEW EVIDENCE OF TIGHTER POLICY U.S. banking data released today are too distorted to draw sweeping conclusions about monetary policy, but they do support the market's assumption that the Federal Reserve has started to tighten its grip on credit, economists said. "It's clear that the Fed has firmed somewhat. Discount window borrowings, net free reserves, the Fed funds rate average and the pattern of reserve additions are all consistent with a modest tightening," said Dana Johnson of First Chicago Corp. Johnson, and several other economists, now estimate that the Fed funds rate should trade between 6-1/4 and 6-3/8 pct. Discount window borrowings in the week to Wednesday were 935 mln dlrs a day, producing a daily average for the two-week statement period of 689 mln dlrs, the highest since the week of December 31, 1986, and up from 393 mln dlrs previously. Moreover, banks were forced to borrow a huge 5.2 billion dlrs from the Fed on Wednesday - the highest daily total this year - even though unexpectedly low Treasury balances at the Fed that day left banks with over two billion dlrs more in reserves than the Fed had anticipated. However, economists said it is almost certain that the Fed is aiming for much lower discount window borrowings than witnessed this week. They pointed to two factors that may have forced banks to scramble for reserves at the end of the week. First, economists now expect M-1 money supply for the week ended April 29 to rise by a staggering 15 to 20 billion dlrs, partly reflecting the parking in checking accounts of the proceeds from stock market sales and mutual fund redemptions to pay annual income taxes. As banks' checking-account liabilities rise, so do the reserves that they are required to hold on deposit at the Fed. Required reserves did indeed rise sharply by 2.5 billion dlrs a day in the two weeks ended Wednesday, but economists said the Fed may not have believed in the magnitude of the projected M-1 surge until late in the week and so started to add reserves too late. Second, an apparent shortage of Treasury bills apparently left Wall Street dealers with too little collateral with which to enagage in repurchase agreements with the Fed, economists said. Thus, although there were 10.3 billion dlrs of repos outstanding on Wednesday night, the Fed may have wanted to add even more reserves but was prevented from doing so. "It's not at all inconceivable that the Fed didn't add as much as they wanted to because of the shortage of collateral," said Ward McCarthy of Merrill Lynch Economics Inc. McCarthy estimated that the Fed is now targetting discount-window borrowings of about 400 mln dlrs a day, equivalent to a Fed funds rate of around 6-3/8 pct. After citing the reasons why the Fed probably has not tightened credit to the degree suggested by the data, economists said the fact that the Fed delayed arranging overnight injections of reserves until the last day of the statement period was a good sign of a more restrictive policy. Jeffrey Leeds of Chemical Bank had not been convinced that the Fed was tightening policy. But after reviewing today's figures, he said, "It's fair to say that the Fed may be moving toward a slightly less accommodative reserve posture." Leeds expects Fed funds to trade between 6-1/4 and 6-3/8 pct and said the Fed is unlikely to raise the discount rate unless the dollar's fall gathers pace. Johnson at First Chicago agreed, citing political opposition in Washington to a dollar-defense package at a time when Congress sees further dollar depreciation as the key to reducing the U.S. trade surplus with Japan.