Monetary Policy & The Markets

With the release of the FOMC's late April meeting minutes the other day, some market players
are trying to put a positive spin on the content to support stocks and commodities. It is true
that the Fed has no immediate plans to shrink its balance sheet or to raise interest rates after the
6/30 wind up of QE2. But the Fed does plan to freeze its balance sheet after 6/30. In my scheme
of interpreting monetary policy, that plan involves a tightening of liquidity for the system and
will require private sector credit demand to pick up substantial slack to underwrite continued
economic recovery. The Fed, in leveling out its balance sheet, would be on stronger ground than
it was last year, but it is gambling that the recent upturns in non-QE2 bank liquidity and system
funding will continue and carry the day. The Fed was dead wrong last year, and I hope their
judgment is better this year.