The Federal Open Market Committee, the Fed’s monetary policy-setting body, starts its two-day meeting today. The attendees-at the September 22-23 FOMC meeting, there were 60 people in the room, including the 10 voting members-have a lot of ground to cover in the approximately 6 hours or so they spend deliberating over the next two days. These people are managing a drastically reshaped $2.1 trillion balance sheet, juggling an alphabet-soup of “temporary” liquidity programs, managing expectations about operational and strategic readiness to exit these programs, monitoring the strength of the economy (and perhaps, even though it’s not their watch, the dollar) and guiding the market on the future course of traditional monetary policy, i.e., the future direction of the Fed Funds rate. It is also dabbling in executive compensation at the banks it regulates. With so many people in the room and so much to talk about, perhaps the meetings should be longer.

The Fed has certainly been doing a lot of talking outside of the conference room. A number of officials have been on the tape over the last few weeks including Yellen, Fisher, Lacker, Lockhart, Bullard, Hoenig, Tarullo, Kohn and Bernanke, to name just a few. Even the normally laconic Kevin Warsh weighed in with an aggressive opinion piece in the WSJ on how tough the Fed could be in fighting inflation. And today’s WSJ had a piece on Brian Sack, who runs the open market operations for the New York Fed. To us, the purpose of the piece was to reiterate to the markets that the Fed has the ability and the talent to do the right thing. In this case, the Fed literally put a face on it (according to the story, it is a brown-haired, blue-eyed, baby face).

Ultimately, perhaps one reason why the FOMC doesn’t need to have a much broader and time-consuming discussion is that even though the issues are momentous, the decisions themselves are easy. The Fed will likely keep the Funds rate where it is for some time, it will not make any dramatic changes to its balance sheet without massively telegraphing them ahead of time and it will continue to support liquidity in the market until the banks are healthy enough to do it themselves.

That said, if there is one picture that might keep them chatting during their meeting, it is the one below (which we confess we first saw at a conference presentation we attended, scrawled on a cocktail napkin and then reconstructed from the raw data). M2, which is a harbinger of inflationary pressures, usually runs in lockstep with the Monetary Base (times 10), which is the sum of the reserve accounts at all Federal Reserve banks and currency in circulation. If M2 were to track the monetary base like it usually does, inflation would be front and center. Those excess reserves that are not making it into the economy are like dry tinder waiting for a light, and the Fed should sweep it up before the match is struck.

This entry was posted on Tuesday, November 3rd, 2009 at 5:02 pm and is filed under Current Events, Government Policy. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.