By Steven K. Beckner
Market News International - Fed officials at the FOMC meeting Tuesday will also be giving a close look to aspects of financial conditions other than stock prices. Before the recent stock plunge, Governor William Poole had described the monetary stance as "accommodative," by which he meant not just the current 5.5% funds rate target but the decline in market rates (incorporating expectations of further Fed easing) and the growth of money and credit aggregates. Other officials have privately made similar comments.
The Fed no longer targets the money supply, but does keep an eye on it, and the broader measures of money have been growing at double-digit rates. Indeed, MZM (money with zero maturity), which subtracts small denomination time deposits from M2 and adds institutional money funds has surged at a nearly 25% annual rate since late December.
Although they have tightened loan terms and standards, banks continue to lend to creditworthy customers, as evidenced by 9-10% loan growth recently.
Those who want the Fed to proceed at a measured pace may well cite such figures to argue that the Fed is already providing ample liquidity and that it should be cautious about pumping money and credit into the economy too aggressively.
With the retreat of producer prices from January's elevated levels, inflation is even less of an issue than it was for the near-term, but there are those on the FOMC who want to avoid overstimulating the economy to the point that, a year from now, at the Fed could find itself again facing demand-supply imbalances and an asset price bubble.
Since the Fed has made clear it would prefer to avoid further intermeeting rate cuts, and since there is a longer-than-usual interval between the March 20 and May 15 FOMC meetings, a 75 basis point rate cut could conceivably be justified on that basis. But there are probably more arguments to be made for sticking with the 50 basis point easing pace.