Monetary Policy

The economic indicators suggest The Fed should keep short term interest rates trending higher.
Economic growth has been solid, capacity utilization continues to grind slowly higher and
business short term credit demand has strengthened substantially over the past 12 - months.
these conditions offer classic support for pushing short rates higher. The labor market has
tightened appreciably, and although there is still excess productive capacity in the system, it is
difficult at best to be confident that its deployment will prove economic. So, bowing to very
intensive criticism, The Fed  has opted to follow a more temperate course in the hopes that
continued US economic growth will not lead to a substantial cyclical acceleration of inflation.

 The economy may experience slower real growth this year compared to 2018, but the addition
of additional production capacity cannot lag to far behind, less an imbalance in favor of economic
demand develops.

The Fed is also planning to operate monetary policy with "ample reserves". This statement implies
that continued quantitative tightening, or the reduction of  the size of Its balance sheet, will likely
proceed far more judiciously than over the past two years. On its face, this statement opens the
door to potentially dramatically higher rates of inflation further out ahead as global excess capacity
is eventually used up. Fed Chair Powell's rather inglorious capitulation to all the forces that wish
to party on leave him with the hope that maybe the inflationary thrust will be the worry of
subsequent Fed leaders.

In the short run, a growing real economy is making full use of available monetary liquidity. In
conditions such as this, it is normally difficult to sustain a powerful upthrust in stocks. Without
a significant slowdown in the pace of economic expansion, large equities players will have to
sell other assets if they wish to sharply bolster commitments to stocks.

What happens if the strong consensus for only continued modest inflation proves faulty and
inflation pressure again perks up? Powell will look like a real turkey as the Fed has to begin to
turn the boat around.