Monetary Policy -- Observations

The Fed left rates unchanged yesterday as expected and continues
to wind down its special liquidity provision programs.

About 70% of of key rate setting indicators suggest that the FOMC
not raise rates. The Fed is putting added emphasis on the large
degree of economic slack still extant in the system. Capacity
utilization is rising, but remains a low 72.7%. Historically, the Fed
has often waited until CU % rises above 80% to raise rates in earnest.
On occasion, the Fed has started the rate adjustment process sooner,
but the continuing large slack in resource utilization gives you a
sense of Their concern.

Note as well that the supply vs demand for short term business
credit remains rather depressed. Measured yr/yr, the growth of
primary funding (supply) has increased by a paltry 1.6%. But
shorter term business credit demand has declined by a large 18.6%.
The commercial paper market may finally be stabilizing as signs
of recovery in top quality paper issuance are being offset by
continuing weakness in the asset backed paper sector. It would be
inelegant to say the least to raise short rates while credit demand is
still falling. Note well though that as economic recovery proceeds, the
credit supply / demand situation can turn on a dime.

Massive inventory liquidation has led to a reduction in the all-
business inventory to sales ratio to a more normal 1.25 months
supply. Shrunken receivables will also recover with business sales.
Thus working capital may be bottoming finally. Business' cash on
hand has surged so a number of companies are now financing
recovering working capital needs out of internal funds.

The Fed has waved off the action in the commodities markets over
the past 2 years, believing that inflation is not likely to regenerate
on a sustainable basis in a depressed economy. Super low short rates
encourage commodities speculation, so the Fed continues to gamble
some here.