The relationship between the weekly money supply announcement and interest rates has attracted the attention of a large number of economists. Recent research by Cornell [2; 3], Engel and Frankel [5], Gavin and Karamouzis [6], Grossman [7], Hardouvelis [9], Naylor [10], Nichols, Small, and Webster [11], Roley [12], Roley and Walsh [13], Urich [14], and Urich and Wachtel [15] indicates a positive correlation between unanticipated changes in the announced money supply and interest rates. The consensus on the relationship between unanticipated changes in money supply announcements and interest rates, however, disappears in the explanation of the phenomenon. Two competing explanations and thus, two hypotheses are offered. The main difference between the two hypotheses lies in the interpretation of future money growth conditioned on the information provided by the money supply announcement. According to the first also known as the expected liquidity hypothesis, market participants believe that the Federal Reserve will promptly offset any deviations in the money supply from its target level. This implies that an unanticipated increase in the money supply revealed by the announcement will be followed by a monetary tightening and, hence, an increase in real short-term interest rates. According to the second hypothesis; also known as the premium hypothesis, market participants interpret the change in the money supply revealed by the announcement as a permanent deviation from the money supply target. This implies that an unanticipated increase in the money supply will not be offset and hence, will raise the inflation premium. Therefore, according to the first an increase in nominal interest rates caused by an unanticipated increase in the announced money supply is due to a rise in real interest rates. According to the second it is due to an increase in the inflationary premium. In order to distinguish between the two hypotheses, evidence has been presented from the foreign exchange and long term bond markets. After analyzing the correlation between unanticipated money growth and the change in the level of spot exchange rates before and after the announcements, Cornell [2; 3], Engel and Frankel [4], Hakkio and Pearce [8], and Hardouvelis [9] find support for the expected liquidity hypothesis. Based on the correla-