Monetary Policy

FF Rate: 4.25%

Cyclical factors that normally govern Federal Reserve policy actions
remain in firm uptrends and it is not difficult to posit another 25
basis point add on to the FF rate at the close of 01/06.

At this point, key factors such as manufacturing order rates and breadth
of same, factory operating rates and the balance between the supply of
loanable funds and short term loan demand all look positive going into
'06, but the momentum of these indicators may well slacken enough next
year to allow the Fed to call a temporary halt to pushing up the FF
rate after it reaches 4.75% or so. At this point, I do not see production
and loan demand growth as strong enough to warrant the Fed to move from
a newly minted "neutral" position to a squeeze.

The action of commodities prices in the seasonally strong winter months
will continue to rank high on the Fed's watchlist. The momentum of the
CRB commodities index has waned in recent months, but not by nearly enough
to give the Fed any comfort. Oil and natural gas prices in particular
remain sticky, and industrial commodities composites are moving higher
as well. The action in the trading pits over the next six weeks could
establish the FOMC meeting for late Jan. next year as pivotal.

I have been very confident about monetary policy and right on in my
thinking concerning same for nearly two years now. But, looking forward,
I find myself much more tentative and less assured about my projections
for rates and basic liquidity.