Monetary Policy -- The Fed Abides...

Zero Bound Short Term Rates
The case for increasing short term rates has eroded since the latter part of 2014. My ISM
composite for new orders has declined from a powerful 65.9 last Aug. to a more moderate
54.7. US capacity Utilization % has declined from the 79 - 80% area to 78.4 % more
recently. My short term supply / credit demand indicator dropped from  a moderate +6.1 in
favor of demand down to +5.2. Since mid- 2014, the CPI measured y/y has decelerated
from 2% to flat.

Ms. Yellen and key members of the Board plainly want to see faster economic growth,
more intense utilization of resources, and a more normal cyclical acceleration of inflation
pressure before responding with a boost to short rates and Ms. Yellen, at least, desires
assurances that a step up in economic activity has enough staying power to draw some
more of the underemployed and longer term unemployed back into  the workforce on a
regular full time basis.

Financial Liquidity
For months my position has been that the termination of the large QE 3 program would
lead to slower economic and profits growth. Measured y/y, total system liquidity growth,
to include the Fed's balance sheet, has fallen from a very strong 11.1% in early 2014 down
to 5.5% currently. I see that as a sizable loss of tailwind for the economic expansion and
a significant impediment to business profits.

US economic progress has also been retarded by work stoppages on west coast docks, severe
winter weather across the eastern two - thirds of the country, reduced oil and gas drilling
activity and the effects of a strong dollar on US competitiveness.

The Fed may be in no mood to confess to the negative economic potential inherent in
terminating QE 3, but the Board wishes to see how the economy responds as the transitory
seasonal and labor dispute factors finish playing out. Thereafter, we all have to confront
whether the reduced liquidity growth discussed above will continue to hamper economic
growth or whether the private sector will continue to respond positively enough to provide
sufficient liquidity to generate moderate economic progress.

Providing the economy begins to grow more rapidly as this year unfolds, the Fed will be
at liberty to push up short rates periodically rather than steadily.