Monetary Update

The Fed is widely expected to increase the FFR% tomorrow.
The cyclical fundamentals support an increase, with
the economy, capacity utilization, short term credit demand
and sensitive commodities prices all trending up. The Fed
remains about 75 basis points behind the curve suggested
by the underlying trend of the CPI (5.0% FFR implicit).

In the wake of the hurricanes and the resulting surge of
fuel prices, the Fed moved aggressively to liquify the system
through the holidays. Fed system credit surged by $43 bil.
or a sizable 5.4% over the final four months of '05 through
the new year.

As discussed in prior posts, such injections of liquidity can
be bullish for gold and bearish for the US dollar. Such was
the case this time as well. Note though, that the Fed has been
draining liquidity rapidly so far in 2006, already shrinking its
portfolio of Govs. and RPs by over $20 bil. This development
puts dollar fundamentals back on a firm positive footing and
leaves the gold bugs having to search around for another reason
to add to their piles.

All players will read the Fed's comments tomorrow with great interest.
Buttressed by knowledge of Fed liquidity injections, analysts and
pundits elected to put a very positive spin on the commentary
attending the 12/05 FFR% hike. With liquidity now being drained,
the appraisals of tomorrow's linguistic tealeaves may be more
sober.