Monetary Policy & GDP Report

Monetary Policy
The FOMC left it unchanged today, as most had expected. With ZIRP
in hand, the focus has been on Fed liquidity support for the credit
markets. The benchmark indicators that guide the setting of the
Fed Funds rate remain deeply depressed. The credit supply /
demand pressure gauge remains very distorted. Demand is weaker
as business loans roll - off (normal), but banking system funding
remains rather tight. Hence the large liquidity injections and the
ballooning of the Fed's balance sheet.

The Fed remains committed to expanding liquidity further if the
economy keeps weakening, but of important interest as well is how
FOMC will behave if the economy extends the very recent
stabilization and then begins to expand before year's end. The
traditional indicators would suggest that a turn to tightening in terms
of rates and monetary liquidity would a good ways off, and the
Fed has many liquidity enhancing swap programs on its balance
sheet that need to be pared in a recovery. If we do see a stronger
economy later this year as I expect, the FOMC management of
the massive liquidity support will be a subject of intense interest
and speculation.

GDP Report
I saw no surprises here. The downturn is very broad and in full
flower based on the report for Q 1. Inventory liquidation was huge
as expected and it will be interesting as well to see how much further
inventories might be pared in the current Q. Another large liquidation
would likely create more bounce back potential later in the year
than is now generally perceived.