Monetary Policy At Mid-year

The best economic trackers of monetary policy have been
trending down in concert since mid-2006. There was
sufficient weakness in the data around year end to trigger
a decision to cut the FFR%. The Fed passed on this option
and triggered the Greenspan commentary about a one in three
chance for a US recession by late 2007.

Now, the data is perking up, particularly for manufacturing.
With the basic trends still down, the Fed is expected not to
change the level of the FFR% on 6/28. However, if the economy
does continue to firm up as we move through 2007, those down
trends in the data series will likely reverse to the upside,
and change the psychology of expectations concerning short rates.
I continue to remain keenly interested in the balance between
production supply and demand as the US moves forward. Rising
capacity utilization normally creates cyclical inflation
pressures.

The Fed will also have to monitor oil and petrol prices closely.
Soon, oil will move into a seasonally strong price period which runs
into autumn and is already in a potent price uptrend from the Jan. '07
low of $50 per bl.