Monetary Liquidity

Both the monetary base and Federal Reserve Credit continue to
run flat with late Jan. '06 levels. Thus, the Fed is tightening
the monetary string, its words notwithstanding. For now, players
in the capital and commodities markets remain smitten with the
idea that the Fed is very close to ending the current round of
boosts to the Fed Funds rate. Chair Bernanke's testimony to
Congress last week that the Fed might consider pausing the hiking
of the FFR to determine the responses of the economy to the
foregoing rate hikes is regarded in some quarters as further
evidence of a growing desire by the Fed to wind up the current
round.

The recent Fedspeak has provided cover for the fact that They have
been in a tightening mode. Plus, the idea of a pause in raising
rates, however sensible from an economic perspective, gives the
Fed "room" to stop raising rates as the off-year election draws nigh.
As I have previously mentioned, this promises to be an important and
nasty campaign for control of the Congress, and the Fed would be wise
not to have itself become a political football that partisans can kick
all around the field. After all, Bernanke is a Bush appointee.

This mismatch between the Fed's expression of its future intent and
its present course of action hardly means that bets based in the
markets which are discounting a soon-to-occur leveling off of
short rates must fail. After all, the markets are discounting
mechanisms. But, recognize the increasing risk levels as well.