Monetary Policy

The FOMC moved to cut the FFR% and DR% by 25 bp each today.
The FFR% now stands at 4.25%. That was the consensus view
among pundits going into the meeting. The stock market threw
a tantrum. Players were expecting 50 bp cuts. They had noticed
the large 150 bp spread between the 91 day Bill rate and were
encouraged by "dovish" Fedspeak from Board members in recent
weeks.

I am not much of a psychoanalyzer of the Fed, so I will not try
to divine why They did exactly what They did. But, I do think it
is fair to say that it is understandable that a number of players
felt snookered.

The longstanding policy variables did suggest a cut, especially
the weakening of the ISM manufacturing survey and a modest downturn
in the capacity utilization rate. The situation was not without
some ambiguity, as short term business credit demand remains
robust. Here though, the recent surge in C&I loans is likely more
a reflection of interim financing for deals still stuck in the
pipeline.

Besides a strong C&I book, home equity and mortgage loans are ticking
up at banks, although both are well off the trends seen in recent
years. The decline in the commercial paper market has slowed sharply
as well. So the system is functioning. Higher risk credits are priced
at much larger spreads over solid, investment grade credits -- as they
should be in a sluggish economy.

The Fed has been adding monetary liquidity more generously to the
system in recent weeks, but this may be only a seasonal development
which could continue into early January, 2008.