Monetary Policy

There is broad consensus the Fed will leave the FFR% unchanged
when the two day FOMC meeting wraps up tomorrow. Last month, the
data veered a bit toward ease, but the Fed ignored it as expected.
this month the key data series I follow have firmed modestly, so
I do not see any reason for change, either.

Based on my super long term model, the FFR% should be around 4.5% -
4.7%. The FFR% is 5.25%, and it is above "target" primarily because
of the rapid drop off in inflation pressure over Half 2 '06 and
the Fed's reluctance to respond immediately in kind. As I have
discussed, the Fed needs to take full measure of the effects of
earlier FFR% hikes on the economy (negative) combined with the
beneficial effects of a rapid deceleration of inflarion upon
real incomes and consumer confidence.

Over the last few weeks, the Fed has drained the extra liquidity
provided for the holiday season from the system. Noteworthy is
that currency and gold traders reacted in a more tame fashion
to the holiday inflation. Noteworthy also is that with short term
business credit demand having flattened out in January, the
Fed drew down heavily on official reserves to maintain the
FFR at 5.25%.