Monetary Policy

2015 marks the sixth year of economic recovery. Yet, it was not until the late summer of 2014
that the expansion was mature enough to warrant an increase in short term interest rates. The Fed
passed on those moments. Now, the indicators that have best worked in the past to forecast that
a rise in the Fed Funds rate (FFR) was timely suggest that, if anything, the FOMC  should take a
step to ease monetary policy. Production growth momentum has been slowing, capacity utilization 
indicates continued slack, banking system liquidity is ample, and the demand for non - financial 
commercial paper has begun to ease.

With a slowing economy based on monthly data, the Fed was correct to pass up a chance to raise
the FFR in 2014 when economic momentum was strong. Here we are now with a sluggish economy
and little if any inflation impetus. Since the economic recovery began in early 2009, the pace of
expansion has slowed significantly in the wake of each QE termination. The monetary policy
factor that has dogged this economic recovery has not been interest rates, but periodic turn offs
of the liquidity tap.

The question of raising the FFR now seems more of an academic issue than a genuine economic
one. Now one could argue that if the fate of the continued progress of global expansion hangs in
the balance because of a 25 basis point increase in the FFR, we have perhaps been deluding
ourselves over whether the world can climb all the way out of the economic hole we dug for
ourselves earlier in the prior decade. So, from an economic perspective, maybe a couple of bumps
up in short rates will not prove very destructive at all.

My concern with monetary policy is whether consumer, business and lender confidence will remain
strong enough to transition away from economic growth driven by central bank expansion of
monetary liquidity to progress fueled by internally generated funds from economic activity boosted
by the continued private sector credit growth. My preference would be to monitor how this
transition is proceeding before pushing up the FFR especially since private sector liquidity appears
adequate to support it. Let's first  see if industrial output can regain momentum with rising operating
rates and if the consequent cyclical pressures start to push up the inflation rate.