Monetary Policy & The Economy

At today's FOMC meet, the Fed maintained the ZIRP on Fed Funds, talked more negatively about
the economy and opted to swap out of $400 bil. short term Treasuries into longs. It will also stop
shrinking its asset backed securities holdings by reinvesting proceeds there instead of Treasuries.
No quantitative easing is involved.

The Fed decided some months back not to continue QE for the forseeable future because They
regarded the final months of QE 2 as involving an unfavorable tradeoff between rising output and
inflation. The primary driver of inflation over the past year was higher commodities prices and
especially rising petroleum sector prices. The global economic expansion has cooled considerably
recently with the result that the commodities composites have softened materially in price. Even so,
the Fed has elected to take a pass on further QE for now.

I believe the economy and confidence has improved substantially as a result of the QE programs.
Stepping away from QE does increase the risk for the economy since the private sector credit
markets are thawing very slowly, and there may not be the rising tide of liquidity to support
continued economic recovery without more QE. However, since a portion of the run up in
petrol sector prices earlier this year was likely attributable to QE 2, and, since that surge was
big enough to crimp the real wage, one can understand Fed reluctance to plow along with
another program quickly.

The foregoing shows how easy it is to gild the economic lilly on this issue. Suffice it to say that
the real economy would be best served by a fast and nervous sell off of commodities that
wrings out the speculators and which gives the economy and the Fed some breathing room.

Over the 1932 - 45 period, the Fed increased the monetary base by between 4-5 fold. there was
war time inflation and black marketeering, but the CPI did not hyperinflate. The recent economic
downturn was not at all as deep as the Great Depression, but the Fed's response has been
very aggressive. For what it is worth, Fed QE has been running awfully strong, and, it is
possible the Fed would like to hold the program in reserve for as long as it deems feasible, so
that it retains QE fire power for the future should the economy falter significantly.