Monetary Liquidity Indicators

Uncle Al talked tough the other week out at Jackson Hole, WY.
But, in vintage style, the Fed has removed its foot from the
brake. It has been buying bonds for its own portfolio, and its
version of the monetary base has started to grow. I think this
development commenced to meet seasonal "add" needs to cover
back to school shopping and then the holiday season down the
road. It remains to be seen whether post-Katrina economic
developments will promote further easing. Note that the Fed,
by jiggling reserves day-to-day, can push short rates higher
even as it adds liquidity to the system.

I bring this up not only because it is worth watching to help
glean the intent of monetary policy, but also because the large
primary dealers, who are also big players in the currency,
commodity, and stock markets, use their knowledge of changes
by the FOMC to trade. These advance notice liquidity indicators
are FALLIBLE markets guides, but players need to pay attention.

When the Fed is adding to its portfolio, it tends to benefit
stocks and gold, and to hurt the dollar. This easing can
also lift the commodities markets and bond prices, but given
the peculiarities of this cycle, the bond market might grow
uncertain since the bulls have been counting on tight money.

The Fed can run this type of easing for a few months without
compromising its longer term intent, which based on the longer run
growth trends of Fed Bank Credit and it monetary base, continue
to support a restrictive policy approach.