The Fed stopped raising rates thirteen months ago. This interrupted a lengthy series of .25 bps hikes that started with Chairman Greenspan when the Fed Funds reached a shallow 1% in 2002. An unprecedented seventeen rate hikes took the Fed Funds up to 5.25%, where we're at today. If one thing is certain, the mantra of the Fed has been consistent: react to the data, but be cautious about future inflation. The Fed has clearly not been complacent about its position. But, have we seen evidence of rising inflation? More so, has this permeated the economy? Certainly the crushed dollar has inflation implications. A strong dollar augers well for the economy but makes our products more expensive overseas. Economic numbers have been showing a decline in inflation, and expectations are coming down. But why would the Fed consider raising rates?

As for markets, it's clearly a liquidity driven vehicle with more dollars chasing fewer goods. Almost like musical chairs, when the music stops you better have a seat to sit in or the game is over. Asset bubbles are inherently inflation, and like Greenspan did in the 90's, Bernanke can target assets by pricking the top with a couple of well-timed hikes. Doesn't make much sense to do this, but it wouldn't be unprecedented.

Some have argued that the Fed needs to be proactive in response to the housing and mortgage issues. Basically, the subprime mess has the potential to spread to a greater part of the economy. At this point, the Fed is sanguine on the problem, but they have acknowledged it as a concern.

Housing is another problem, as their contraction has pulled some growth away from the economy. Could this bleed into other areas of the economy, too? Global growth estimates are coming down, as are earnings estimates for US companies going forward. While a jump is expected in 4th Q 2007, many companies are saying let's "wait and see for 2008." A downward shift in growth may very well force the Fed to stimulate the economy before a recession becomes possible.

The Fed is likely to do nothing in the months ahead, continuing to talk tough on inflation but holding back with their trigger finger.

Consider this: The stock markets are either at all-time highs or near multiyear highs. The bond market is still in a multiyear rally with long bond rates under 5%. The global economy is rather healthy, and some argue that 5.25% is a good rate to not overheat the economy (Q2 estimates for GDP just came in at 3.4%, so this theory may hold water.) Looking back historically, the Fed would never cut rates when the markets were at/near all-time highs. Even with moderating inflation, it's impossible for the Fed to forecast an economic slowdown. If 5.25% was too much, they would have cut much earlier (last year, perhaps). Liquidity is near all-time highs, too, but the Fed has been cutting off the supply recently (seen in dropping M3 levels).

Bottom line: Next week brings another Fed meeting, and while the hype while grow to a crescendo, the "movement" crowd is bound to once again be disappointed.

Price Headley is the founder and chief analyst of BigTrends.com.