Today's sharp stock market sell off on the heels of yesterday's sloppy
close clearly suggests plenty of players were expecting the Fed step
up and announce further quantitative easing that would augment its
balance sheet.
The indicators I use to track Fed interest rate policy still stand 50%
in favor of a boost to the Fed Funds rate. The laggards remain a
very weak short term business credit supply / demand pressure
gauge and a still depressed capacity utilization rate. The Fed
certainly continues to figure that with a large gap between
production capacity and output, there should be little inflation
potential. The indicators are not about to signal higher rates until
such time as production re-accelerates and commercial loan demand
recovers.
One interesting possibility to consider is whether the Fed would
entertain a normal seasonal addition to reserves for the upcoming
holiday season. With a slowing economy, and important November
elections ahead, the FOMC could, if it wishes, elect to add reserves
temporarily to the system starting in September and do so without
fanfare. Just a thought, but it could be a nice little tonic.
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