First of all, just because we haven't had a bank collapse in a few days doesn't mean that the financial sector has been stabilized. Even if Citi had better than expected losses, that too does not mean the whole industry has been stabilized. We're not close to being out of the woods, and all that I'm saying is that the Fed can't act as though we are out of the woods. Rate hikes at wrong times can have dire consequences. One developing story related to that is in Europe. As you know, the ECB hiked rates a few weeks ago, as they insisted that targeting inflation was the best move despite widespread resistance throughout Europe. Now, the ECB might have to cut rates soon because of growth concerns they exacerbated by raising rates in the first place.

As countries such as China have shown us, it is possible to thrive while focusing almost solely on growth. I'm not advocating that, but I just think that too many people discount growth to rapidly. If an economy is not growing, then massive problems erupt, that (in my opinion) can be much more severe than having inflation around 5%.

And you didn't include an entourage line... that's poor work tom.

You are absolutely right tjack. There is alot of talk that banks will be reporting more losses in the coming quarters. Wachovia's $8b hit is worrisome in of itself, but watch out for the earnings from Washington Mutual.

The Fed and the US Treasury still have alot of work ahead of them.

Tomorrow is a big day on the market...Congress will vote on the bill for Freddie and Fannie. The USD has made a move already. oil prices are expected to drop even further on congress trying to regulate the oil futures market. Asian and European markets are up already. Futures market in US is up .
Bullers will rule tomorrow. Buy USD tonight...

It's true that growth is and should be a prominent component of monetary policy; but what happens if inflation continues to grow out of control while the economy continues to cool? Then you have stagflation which is far harder to dig yourself out of than a simple period of depressive growth or a mild recession.

With that in mind though, I don't think the Fed's attempts at adjusting lending rates will do much for controlling inflation. It's obvious from the IPI and components of the consumer-level price gauge that the greater component of inflation recently has been energy, food and other raw material prices - that is a global problem and can't be solved by higher US rates. What's more, the American consumer has long been a net borrower and reliable spender, so the exchange rate only further places an inflation and growth barrier in place.

I think the policy group should start using some of that creativity they used in providing the market with liquidity into putting the dollar on a level playing ground - not for trading opportunities but for the health of the economy.

The new Watch What The Fed Watches report was published this morning.

It is very interesting to note the rebound in the hawkish bias in Fed Futures. There is now a significant probability of a hike by September and at least a quarter point by the end of the year.

Also interesting is the recent activity in the credit market. Though a lot of the second quarter numbers are out and the Fannie and Freddie situation is looking better, there is still considerable aversion to risk and long-dated maturity debt. It's this caution that I'm going to keep close watch on as speculation for policy action heats up at the end of the month/beginning of August and when I'm keeping track of the carry trade.

Has speculation increased the price of oil a recent paper by Phil Abbott of Purdue says no. There is no correlation; however he does find correlation in the price of commodities and the fall of the dollar. The paper also sights increased global demand for commodities has made them rise, the demand would fall if the dollar rose. If the dollar rose then the bubble on commodities would pop and we could see inflation recede significantly. Because commodities are priced in dollars all countries have an incentive to prop up the dollar. Will intervention occur, it is likely because everyone seems to benefit from a strong dollar, the G7 has intervened in the past, now days the G20 could potentially move the market. However the more countries involved the harder it is to coordinate. The dollar lost 45% of its value in 2002-2007 oil prices increased substantially; if the dollar strengthened we will see the opposite. A drop in commodities would accompany a strengthening of the dollar. This would combat inflation and make the Fed's job much easier. In regards to speculation do gamblers influence a football game, has speculation forced the price of oil down, no but populist politics are always a mirage. Let the markets be, but in an election year short term gain outweighs long term efficiency. You're right about the Bull part but it's because the Euro is overvalued not Congressional intervention.

I have a question how is the ISM deteriorating if the number went from 49.6-50.2 isn't that an improvement. If not please explain.

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The report makes reference to the ISM's service sector activity gauge (as the service sector accounts for something like 70 percent of GDP) which dropped from to 48.2 in June from 51.7 the month before.

I believe you are referring to the manufacturing-based report, which finally nudged back into positive territory for the first time in five months.

OK... the study looks interesting, but there are plenty of other people/groups who would disagree with that assessment. To name a few, George Soros, OPEC (who granted may be biased), and governments around the globe (including many of the G-8).

I think we can all agree that there are a plethora of reasons driving oil prices, and it's important not to dismiss these theories. I agree that a weak USD has been a crucial factor. I also agree with John Kicklighter that a focus should be to work to strengthen the USD... and I'm sure that Bernanke and Co. realize this. Look at the last week or so: oil plunged, the USD soared. This is not too complicated.

However, it seems like Bernanke is going to continue to try and foster that result without hiking rates. After all, a strong USD will certainly help oil prices, but if growth rates get too low, then we enter a more severe recession. My opinion is that the resilient (and often unwise) spending habits of the American consumers has helped moderate the economic troubles thus far, but if unemployment rises and the credit crunch worsens (both likely outcomes of a premature rate hike), then spending will certainly suffer.

It seems like maybe, just maybe, the USD could be headed for some good times.Dollar Rallies on Strong Data, but Watch Out for a Big Week

While the EZ and the UK seem headed for more economic troubles, the USD might finally be building the momentum it needs to break out of the range that it's been in for most of the year.

What does everyone thing about that? What do you think the Fed will do next?

I'm surprised that market participants aren't more cautious. Fed fund futures are pricing in a better than even chance of a rate hike by the end of the year; but there is only a 6% probability of a 25% hike next week.

I can understand the hawkish lean (considering inflation - though even oil and food prices have started to pull back); but credit and financial markets show banks and lenders are still concerned about market conditions, the consumer is just starting to fall apart and global growth is slowing down in general.

IMO, the GDP will be a big determinant for the Fed decision for August and September. A strong reading (better than the 2.0 percent forecast) would raise the probability of a hike next month sharply and for September dramatically. A disappointment (under 1 percent - better if it's negative) will essentially kill any chance of 2.25 percent benchmark rates this year.

Any other insights?

I dont think that the markets view this current surge of the USD (and other related figures, such as oil), as being anything permanent. I think that most view these movements as a mirage, and do not indicate any broken trends.

Let me put it this way... if we were looking at those figures you gave 3 weeks ago, would they have surprised you? They wouldn't have surprised me. What I'm saying is that I think the reason those numbers are still what they are is that the market expects the bad news to return soon, and hence the FED will be unable to hike rates anytime soon.

Thoughts?

I'm kind of confused why the US markets (currencies/equities) are doing so poorly today. NFP was better than expected, revised NFP was good, ISM came up better than expected (above the big 50 line) and ISM prices paid was also better than expected. Sure, unemployment was a tick to high, but I would expect a bit of bigger ralley, especially considering yesterday's drop.

I can see your point of view on the bad economic conditions coming back to bite the markets again. On the other hand markets are some how better prepared and the reactions will have less volatilities. Most of the business have already adjust to high oil prices by sharing the burden with the consumers. Investors that made money on the bearish market are on the side line waiting. Any bit of a good news will have more participant then the shorts sellers on the other side. Fed's are doing a good job on helping the financials and housing markets. What has happened on the last 12 months will be on the finance books for the new generation. I would be ready to invest in a CDO market if something was pulled together with those new prime loans. Every loan given by a bank now is a good one. Hopefully sometime by the end of this year things will get better on the market.

While i think that we can all agree that the ECB is very likely to stand pat... there is a slight possibility of a move. For me, I can't decide on whether a hike or a cut is the more likely of the two... there seem to be reasons on both sides. On the one hand, growth has been deteriorating in Europe, yet on the other hand, inflation is still there. Additionally, lowering rates now after hiking them last time sort of seems like they're raising a white flag and admitting that they made a mistake last time.

What does everyone think?