Monetary Policy -- FOMC 9/21 Meeting

Short Term Interest Rates
No change. The indicators I use to suggest whether rates should be
increased remain at 50% in favor of a lift. Fed sees too much slack
in the economy to raise rates now.

My super long term interest rate model suggests that the 91 day T-bill
should be priced to yield 3.4% presently. The spread between the
model and the .15% yield on the bill reflects the large slack still
extant in the economy and the Fed's concern that the CPI is weak on a
cyclical basis.

Liquidity
In a convoluted statement that appears logically inconsistent to the
layman, the Fed gave itself more leeway to add liquidity to the system
in the months ahead under the premise that a rising CPI was too weak
for this point in the recovery cycle. The Fed sees this view as
consistent with the idea that deflation pressure could re-emerge and
create difficulties for the credit market (collateral values).

The Fed made it clear that it does not wish to shrink its balance sheet
and the monetary base at this time. That is fine. However, the FOMC
has leeway to expand its balance sheet on a seasonal basis when it
wants to. I would also advise the Fed to plan to expand its balance
sheet at a 6% annual rate until it sees a clear positve turn in private
sector credit demand in order to maintain minimum liquidity growth
as we go forward.

Right now, the Fed is providing sizzle without the steak when it comes
to liquidity.