Fed officials ... likely anticipated some fallout in fixed income markets. We believe ... that Fed officials wanted to signal a greater probability of tightening in 2004 than had been priced into markets.

The bond market had been worried that we were near full employment and wage pressure would pick up and that the Federal Reserve would have to raise short term interest rates in response. But now that the all important employment cost index was up just 0.6 percent, the Fed doesn't need to raise short term rates because the economy is slowing down.

Certainly, there was nothing in Mr. Greenspan's testimony to suggest he has seen any strong preliminary data from the April employment report.

The consumer numbers look fairly strong, although at least some of that strength is likely to fade in coming months if housing continues to weaken. The mortgage applications data suggest home prices are already weakening.

You typically see a rebound in the labor force when the economy starts to recover. But because businesses are operating so much more efficiently, there's a limit to the number of jobs available. Unemployment could still go up a few ticks.

That low inflation rate leaves the Fed plenty of latitude to remain on hold, and reinforces our expectation that [a rate increase] is unlikely before the third quarter of 2004.