2007...Part 2 -- Monetary Policy

Best here to briefly fast forward to 2008, first. This
upcoming national election year in the US currently looks
to be wide open across the board. All the more reason for
the Federal Reserve to desire to fly under the political
radars and not have either growth, inflation or the Fed Funds
Rate become "hot button" political issues. Thus for the Fed,
2007 is the year to do what might be necessary to have the
economy straightened up and flying right through 2008.

Working backward, the Fed would prefer to tighten in the early
part of next year if needs be, and it would prefer to loosen
up on the monetary reins in the second half of '07, provided
a "goose" to the economy would usher in a more balanced 2008.

The growth of industrial production and the strain it puts on
capacity utilization and resources at large is a key factor
in the setting of monetary policy. The Nation's operating rate
is likely to finish out 2006 around 82%. The growth of US
capacity has been inching up, but is still a little below 2.5%
yr/yr. The Fed wants the economy to grow but not reach effective
capacity of 85-86% until very late in 2008. Now since inflation
pressures tend to accelerate when the operating rate exceeds
82%, the Fed would likely most prefer to see production growth
stay modest for a while in the hope that nudges up in the
operating rate would push business to expand capacity
sufficiently to keep a reasonable balance, particularly in 2008.
Can the Fed fine tune with such precision? Do not bet on it.
However, since I believe this bit of analysis of Fed intent
is as right as rain, I suspect if policy tweaks are needed,
tight comes before loose.