Monetary Policy -- Clarity Needed On Liquidity

The Fed will update us on monetary policy this Wed. Dec. 12. Operation Twist winds up
at the end of this year, and the Fed is running out of short term Treasuries to swap out for
longer dated  T-notes and bonds. The Fed needs to indicate whether They will elect to
continue expanding the longer dated Treasuries and whether They will buy same outright
to do so. The Fed should also explain the irregularity of QE 3 MBS purchases and why
They have been running 50% below the purchase pledge made in Sep.. Bernanke will also
face questions regarding Fed policy options viv a vis the fiscal cliff.

My broad measure of credit driven financial liquidity continues to expand, but measured
yr/yr, it is still growing  slowly and could be inadequate to support an expanding economy
without a QE program that provides sufficient monetary liquidity to offset the very slow
rate of credit funding growth. Bernanke's persistent criticism of the very conservative
lending practices of banks reflects his awareness of the issue.

Based on the growth of monetary liquidity in the financial system this year, the real economy
should have performed better. But stock market  and economic performance both lost
substantial momentum after the large $100 bil. currency swap the Fed put on in late Dec. '11
ran off by springtime and the Fed allowed its balance sheet to contract. So, there does
appear to be a confidence factor that reflects Fed policy and intent. But note also that money
M-1 grew only at a 2.4% annual rate over the past three months. The three month time frame
is admittedly a short one, but the deceleration of growth in the basic money supply is exactly
what one should expect after an extended period of a $ flat Fed balance sheet (Fed Bank Credit
is now around where it was at the end of QE 2 on 6/30/11).