Monetary Policy -- Fed Sits On Its Hands

Policy remains unchanged with the exception that the Fed will
prevent the automatic shrinkage of its balance sheet by rolling
over maturing mortgage backed securities into Treasuries. The
shrinkage that occured since this past spring coincided with a
slowing of the economic recovery and left them chagrined and
surprised so they telegraphed their fresh intent ahead of time.

But the bigger issue -- slowing monetary liquidity growth and no
private sector credit growth is unresolved. This pattern, if not
favorably settled within the markets themselves, is a prescription
for serious economic trouble. The Fed is in observer mode now and
later this month will get an earful from a range of economists who
attend the KC Fed's annual economics shindig at Jackson Hole, WY.

The Fed's prior 2009 - early 2010 massive quantitative easing
was a major and calculated step to unlock monetary and credit based
liquidity and harkened back to the massive liquidity infusions used
to generate economic recovery at the bottom of the Great Depression
in 1932. So, the recent easing of policy represents an extraordinary
step by the Fed and they probably prefer not to do more monetary
easing unless they feel compelled by economic reality and political
pressure.

There are a few indications that the shrinkage of private sector
borrowing may have wound down and that banks, who have been
adding jumbo deposits in recent weeks, could be preparing to step
up lending. But, this is entirely preliminary and could be reversed.

Sometimes the Fed has critical knowledge ahead of the markets and
sometimes they seem to lag the outside world and struggle to catch
up. For now, players will debate the problem and its possible
remedies, but the uncertainty will linger on.