Incredibly, or perhaps not so incredible, the market has effectively moved to a small chance of one more tightening this year, in October or December, and then the eases come cascading down through the FOMC meetings in 2007.
The coming week, however, will decidedly push the market to where the Fed wants the market to be setting the odds. On Thursday, the Fed Chairman Ben Bernanke speaks on productivity at the Clemson Institute for Economic and Community Development, in Greenville, South Carolina at 12.30 PM ET. On the same day St. Louis Federal Reserve Bank President William Poole speaks about the Fed to the Dyer Co. Chamber of Commerce, in Dyersburg, Tennessee at 1 PM ET.
How they want to push market sentiment is anyone's guess.
What isn't a guess is that Bernanke will give us a reasonable clue of how the Fed forecast of moderate growth and moderating inflation is faring. Poole will tell us how the Fed goes about making and evaluating a forecast using published data and anecdotal information. The combined statements will give us a sense of what the FOMC is looking at and how they will be reacting in the near future.
My opinion is that it is still a no-go in September (Bernanke would look silly tightening so soon), but that the odds going forward are not as skewed to ease as the market is pricing.
In my days of learning the bond market the old adage was that the market moves in the direction that creates the most pain. A sell off with a steepening of the Euro curve in 2007 would be a major league pain.