The Federal Reserve this week reiterated its assessment that "economic conditions ... are likely to warrant exceptionally low levels of the federal funds rate for an extended period". While official rates will stay low, however, the Fed has already begun to withdraw liquidity from the banking system.

The monetary base – currency plus bank reserves at the Fed – has fallen for three consecutive weeks, by a cumulative 4.7%. This mainly reflects the impact of the "supplementary financing programme" (SFP) under which the Treasury issues bills and deposits the proceeds at the Fed – this has more than offset a further liquidity injection from central bank purchases of mortgage-backed securities (MBS).

Monetary base movements have recently led equity market fluctuations – see Andy Kessler's Wall Street Journal article and the chart below.

The Fed will complete its $1.25 trillion of MBS purchases by the end of the month but carried $1.066 trillion on its balance sheet as of Wednesday, suggesting a further substantial liquidity injection. The SFP, however, is scheduled to rise from $75 billion to $200 billion. The net impact of these and other changes on the monetary base is uncertain; a further decline would be another warning signal for markets.