his is the most remarkable financial report that I have ever seen. It comes from Jon Hilsenrath at WSJ:

Federal Reserve Chairman Ben Bernanke will begin this week to lay out a blueprint for a credit tightening, to be followed once the Fed decides the economy has recovered sufficiently.

The centerpiece will be a new tool Congress gave the central bank in October 2008: an interest rate the Fed pays banks on money they leave on reserve at the central bank. Known as "interest on excess reserves," this rate is now 0.25%.

The Fed is still at least several months away from raising interest rates or beginning to drain the flood of money it poured into the financial system in 2008 and 2009. But looking ahead to when the economy is strong enough to warrant tightening credit, officials have been discussing for months which financial levers to pull, when to start and how best to communicate their intent.

When the Fed is ready to tap the brakes, it plans to raise the rate paid on excess reserves, according to Fed officials in interviews and recent speeches. The higher rate would entice banks to tie up money they otherwise might lend to customers or other banks. The Fed expects such a maneuver to pull up other key short-term rates, including the federal-funds rate at which banks lend to each other overnight—long the main tool for steering the economy.

Over the last six months M2(nsa) has grown at only a 1.7% annualized rate. One of the slowest money growth rates in decades.

The current stock market weakness and weakness in gold are the direct result of this slow growth. For some at the Fed to think they have to tighten credit at some future point from here is simply remarkable, although a stable non-growth money supply would be ideal, it appears that the Fed is not looking at the situation from this perspective, rather they believe they are maintaining an easy money policy simply because interest rates are low.

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