Monetary Policy

The Fed has started a two day meeting on monetary policy with
results to come tomorrow afternoon.

It's an interesting time for a meeting. The Fed has slashed the Fed
Funds Rate dramatically over the past six months. The cuts to the
FFR% match the severity of the blowout of shorter term business
credit demand resulting from the collapse of key components within
the broad financial service sector of the commercial paper market.
There has been a moderate offset to the $600 billion plus decline
in commercial paper outstandings via a nearly $300 billion increase
in commercial and industrial loans by banks, but this rise underscores
the stresses in the financial markets, because much of this paper is
comprised of levered and other low quality loans that are caught up
in a stalled deal pipeline. Viewed historically, the fast decline of the
FFR% is well out of proportion to the weakening of economic demand
witnessed so far. Moreover, weakening demand in the US economy
has been accompanied by an acceleration of inflation, that,
in itself, has contributed substantially to the slowing of the real
economy.

In short, the Fed's action has been apposite to the turmoil within the
financial service sector, but perhaps well overdone relative to the
broader economy and the inflation underway.

Now, fresh reads on critical economic data will become publicly
available over the next week. No doubt, the Fed has advanced
soundings, and if the fresh info does not paint a much darker
picture of the economy, then it is fair to wonder if perhaps a pause
period on the FFR% might be appropriate. After all, narrowing of
selected quality yield spreads, stronger bond market volume, and
a recent flattening out of the weekly leading economic indicators
all suggest relief of pressures, whereas the inflation situation is less
benign. In addition, the Fed knows the Treasury is starting to
distribute the tax rebates enacted earlier.

I long ago gave up trying to analyze the psyche of the FOMC, but
I think one has to be struck by the outsized cuts in the FFR%
relative to the real growth / inflation environment.