Monetary Policy

Weakness in production, declining capacity utilization,
a narrowing of producers with a positive outlook, a
flattening of short term business credit demand. It's
what the US has now and long term Fed practice clearly
suggests a cut to the Fed Funds Rate. The tenor of recent
comments by chair Bernanke and others on the Board point
away from a rate cut. Current Fedspeak says rates may have
to be raised if inflation surprises to the upside.

What gives? My guess is the Fed sees the run offs of excess
housing and goods inventories as the prelude to eventual
recovery of production and later, housing investment. So,
the Fed is forecasting that rising final demand for
consumer goods, services and exports will lead to this upcoming
recovery of production and housing. Implicit of course, is the
notion that weaker production and housing will not produce
increases in joblessness and weakened confidence that could
bring the economy down. The Fed may also not mind if the economy
stagnates for a few months, if it makes it easier to squelch
inflation pressure further and create enough slack to goose the
economy later this year for a clean run through 2008.

Whatever, the Fed may be waiving off long standing practice and
you should keep that in mind in assessing the outlook for both
stocks and bonds, since the dynamics of the US economy can
fool the best of us at moments like now.