The Federal Reserve’ Open Market Committee meeting did as all expected and left the very short term Fed Funds Rates – the overnight bank to bank loan rate - alone. As always, it was the Statement that impacted rates. The 10-year Treasury closed +.034% making the rate 4.668%. The price, which always moves in opposite direction of rates closed -14/32 to 98 22/32.

The FOMC Statement emphasized the FED’s continued concern about inflation. In the words of the FED, "Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures."

The FOMC Statement reaffirmed previous statements that the economy is slowing. "Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters."

The statement closed with its usual wait and see attitude for future directions. "In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

The bond market and its analysts believe it will be a long time before we see the FED lowering the Fed Funds rates. Mitchell Stapley, of the Michigan based Fifth Third Asset Management said, “Until we really see those indicators hit their targets, that is 2 percent or lower on core-PCE, and the unemployment rate ratcheting up, these guys are not going to lower rates,''

Interest-rate futures prices show the likelihood of a quarter-percentage point cut in the Fed's overnight lending rate between banks at its August meeting fell to 12 percent, from 17 percent before the announcement. Traders had priced in a 100 percent certainty of a cut to 5 percent as recently as March 8.

``They basically said the same things: the economy's going to slow, inflation pressures should come down, we're going to remain vigilant on inflation,'' said William Hornbarger, chief fixed-income strategist in St. Louis at A.G. Edwards & Sons Inc. ``We really think it's going to be like this for most of the year, with yields at 4.5 percent to 4.9 percent on the 10-year note.''

TOMORROW, 10 May 2007

At 10:15cdt {15:15gmt} Fed Governor Randall S. Kroszner will speak on The Future of Payments: Challenges and Opportunities At the 2007 Payments Conference, Chicago, Illinois. It is doubtful it will have any affect on the bond market, but a FED speech this close after an FOMC meeting may include commentary of the FED’s decision today.

The market opens with some important items. The Import and Export Price report is one of them. The Import prices are important, but seldom influence the direction of rates. It is anticipated to be +0.9% verses last month’s +0.6%. Export Prices seldom affect rates. There are no predictions.

The weekly Initial Jobless Claims is the only weekly event that can have an impact on the bond market. The economists are expecting 315k to 325k workers to file for first time unemployment insurance. That is higher than last week’s 305k.

Trade balance is important and can occasionally move the price of bonds. It is anticipated to be -$59.5B to -$60.1B

Finally, there is the Treasury Budget. The deficit is predicted to be -$120B to -$150B. It could be lower as receipts into the Treasury were almost 25% higher. That would be great for rates as the US Treasury Department would be competing less for dollars.

Steve Boxmeyer [612] 799 – 6858
steve@LendWithIntegrity.com