Monetary Policy

The Fed is widely expected to keep the Fed Funds rate
steady at 5.25% at tomorrow's FOMC meeting. Based on
traditional rate setting data, a conservative could
still make a case for a higher Fed Funds rate. Data
available through early September show industrial
activity and business loan demand at strong levels.
Moreover, unit labor costs have accelerated sharply
to 5% yr/yr. So, if the FOMC elects to stay in the
"pause" mode, they will be continuing to work off
their economic forecast.

Reflecting the sizable weakness in broad commodities
composites, my longer term inflation indicator -- a
twelve month % ROC measure -- is about to fall below
year earlier levels for the first time since 2001.
From this perspective, the Fed is on sounder footing.

Fed Bank Credit and the monetary base have been flat
since May '06, as the Fed has wrung out Greenspan's
last hurrah, when he let Fed Credit expand at a
rapid 5% rate over a short interval in late '05 -
early '06. However, with the economy having slowed,
BB must be careful to cushion it with a reasonable
expansion of the Fed's portfolio to meet the holiday
season.