FOMC & Monetary Policy

Most observers expect the FOMC to leave the Fed Funds rate
(FFR) unchanged at 5.25% at tomorrow's regular meeting. The
key data I track for monetary policy trended down over the
second half of 2006, but have stabilized recently, particularly
capacity utilization and manufacturing activity. It should be
said that the Bernanke Fed may have diverged from the Greenspan
Fed in electing to hold the FFR% at 5.25% despite evidence of
a weakening economy over Half 2 '06. I guess the Fed can coast
on this data for a while if it wants to.

The leading economic indicator sets I follow show a sharp firming
up for the month of April. As Aristotle liked to say -- one swallow
does not a summer make -- so the upturn needs to be carefully noted
but not raptured over. If the Fed does elect to mention that the
economy could be regaining strength in the FOMC meeting statement,
it could give the markets a shiver, since some players would
immediately conclude prospects for an eventual FFR% cut are out
while potential for a FFR% increase later in the year is in. So,
the FOMC wordsmithing tomorrow might be of special interest.

I also note that FOMC added substantially to its portfolio last week
both via outright Treasuries purchases and RPs. It is not clear
why they did this, although cash in the system is very low, and they
have been stingy in recent weeks. The Fed Bank Credit portfolio will
be worth watching carefully over the next week or two as well.