Monetary Policy

The Fed left rates unchanged today as everyone figured they would.
At present, the case for raising rates is 50% based on time tested
indicators of Fed behavior. The main issues in the way of hiking
rates concern the low rate of capacity utilization and the fact that
private sector shorter term credit demand has yet to turn up.

As an illustration of still low capacity utilization, consider USA steel
output. In mid-2008, output was running at 2,155K tons and the
industry operating rate topped 90%. When the economy went into
free fall later in the year, steel output fell to 990k tons by 04/09,
and cap. util. fell to 40%. Now, steel output is running 1,800K and
the operating rate is up to about 75%. More intense cost and pricing
pressures arise once the steel operating rate crosses 83% or so.
Since steel output appears to be moderating now, it will be a while
before price increases intensify again. Ditto, globally.

Both business short term credit demand and consumer credit (excl.
mortgages) fell sharply from mid-2008 through early 2010. Both
sectors are showing signs of stabilization in recent months, but no
upturns are in place.

The Fed bides its time until there is some indication of tighter
resource utilization and more sustainable inflationary pressure.