Macroeconomics, many economists agree, is as much an art as a science. And sometimes it requires the 'reading between the lines' skills of a Kremlinologist during the Cold War.

Here's my reading between the lines analysis of recent Fed statements on housing: more housing-related write-offs (and pain) for certain banks and others with mortgage-backed debt.

Yellen, Bernanke speeches: Signals?

The evidence: first, San Francisco Federal Reserve President Janet Yellen, currently a non-voting member on the Fed's Open Market Committee, delivers a low-key, candid-but-not-alarmist speech Monday to the San Diego Economics Roundtable in which she warns that "things could get worse before they get better" and that problems affecting the financial system could stick around "for some time."

Economist David Wang said Yellen's speech could be interpreted "as her staking out a claim on the dovish [interest rate cut] end of the Fed" were it not for the fact that the measured, always dispassionate Yellen "is not known for politicking or embellished commentary."

The Federal Open Market Committee issued its decision on interest rates Wednesday. It kept rates unchanged as expected but increased the hawkishness of the accompanying statement. It maintained its credentials on combating inflation but was careful not to cause any trauma to the financial markets that would require reversing this position. If this were to occur, the Fed would lose credibility.

The Fed wants to maintain its credentials on inflation control. This is necessary for it to protect the dollar from an uncontrolled spiral downward and an increase in core inflation. However, there is very little that the Fed can do to limit total inflation in the short term. The current inflation is really being primarily driven by the rise in oil prices. This is being caused primarily by the increase in demand in emerging markets, such as China and India. Fed policy has little effect on this. Oil prices rose throughout the last Fed tightening cycle despite the rise in the yield on short-term Treasury Bills.

Oil actually began its rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

Are the days of wine, roses and interest rate cuts over? The answer for now seems yes.

In a statement released today, the Federal Open Market Committee said it decided to keep its target for the federal funds rate at 2% because data indicates that labor markets have soften further and financial markets remain under stress. Moreover, the credit crunch, the lousy housing market and rising energy prices are "likely to weigh on economic growth for the next few quarters." No kidding.

The FOMC's decision, which comes amid growing fears about the outlook for inflation, should not have come as a shock to investors. Federal Reserve Chairman Ben Bernanke and other top bankers have hinted for months that the days of wine, roses and interest rate cuts would be coming to an end. In fact, the market seemed to have already absorbed the market. The major stock market averages barely budged after the announcement was issued.

Reuters reports that Treasury Secretary Hank Paulson is in the middle of oil country -- Qatar -- talking about how a strong dollar is in the U.S. interest. With the dollar down 72% since January 2001, it would be nice if Paulson would use his power to strengthen the dollar.

Unfortunately, he doesn't have enough power or chooses not to use it. The power to influence the strength of the dollar resides in the Oval Office. With a $410 billion budget deficit, $9.4 trillion in government borrowing, and interest rates that have dropped from 5.25% to 2% since August, it's not a big surprise that the dollar is so weak.

And since oil is denominated in those ever-weaker dollars, the price of gasoline tops $4 a gallon -- a big "surprise" to the Oval Office occupant. Nevertheless, this is great news for Qatar and its neighboring countries. Our leaders are protecting the interests of those Middle Eastern countries -- both through military policies and economic ones -- while talking about a strong dollar.

Those countries have outsourced their military defense to the U.S. And the rest of us are paying the price.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

It seems that the Fed just got done cutting rates. Now, it may want to raise them. Inflation appears to be getting bad enough so the the agency could need to up interest rates to keep prices from overheating. According to Reuters, "Two Federal Reserve policy makers warned on Wednesday that interest rate increases might be needed before too long to curb inflation." And, the FT writes,"A sell-off in the US bond market pushed the yield on 10-year Treasuries above 4 percent on Wednesday for the first time since January, as investors bet that pressure from record oil prices would force the Federal Reserve to raise interest rates this year."

In other words, two different papers using two sets of reasoning to come to the same conclusion. Great minds thinking in the same direction but coming at it from different points of view. In all probability so many smart people are probably not wrong.

But, what about that recession? If credit is tight and housing markets continue to fail, where is the relief for consumers? Their spending did drive the economy for half a decade. If they do not return to their old habits, how does the foundation of a recovery get built?

The answer may not be very attractive. Inflation may be cut down by Fed increases, and the lack of credit may drive the economy further into a deep downturn.

It may be as simple as realizing that both problems cannot be fixed at once.

Douglas A. McIntyre is an editor at 247wallst.com.

It says a mouthful when banks start to call for higher interest rates. The view of managements at financial companies may be coming around to the point where they believe inflation is a bigger problem than rates are.

According to Reuters, "The chief executive of Europe's biggest lender on Tuesday called on central bankers to raise interest rates in order to combat inflation." The head man at HSBC (NYSE:HBC) fears that there is no overall plan in the financial community to keep rising prices down.

The viewpoint about inflation is probably right, but that does not mean that governments will begin to up rates. In places like the US, where people are still defaulting on mortgages at record rates, and auto loans and credit card payments are under pressure, upping interest rates would be hard to swallow.

There is also the matter that increasing banking rates may do nothing to halt the spike in food and gas prices. These are being set, to a large extent, by demand outside the US, especially in developing nations. Messing with the cost of lending is not likely to fix that.

Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.

Activity in the futures market may be pointing to a dollar rally, but that rally is off to an inauspicious start.

The dollar Monday fell about 1.2 cents versus the euro to $1.5522 and about 1 cent versus the British pound to $1.9570, even while a key currency futures indicator turned dollar bullish for the first time in more than 2 years.

Net dollar longs by hedge funds and other currency traders/investors totaled 21,315 on April 29, 2008, according to data released by Commodity Futures Trading Commission in Washington, Bloomberg News reported Monday; there were net dollar short positions in each of the previous 123 weeks.

One oft-repeated phrase from Washington is that there is "no magic wand" that can lower oil prices. This has proven to be comedic gold for some. But for people who find themselves paying nearly $4 a gallon to fill up their tanks, the joke is not so funny. After all, with an "oilman" in the White House, it should come as no shock that the price of a barrel of the gooey stuff has risen 5-fold since January 2001 -- hitting a record $126 today.

I noticed that every time the Fed cut interest rates, the dollar dropped in value and the price of oil rose. As I posted, this dynamic is as sure of a bet as you can get in the real world. That's why traders are shorting the dollar and going long oil. And they're betting enough on that trade to drive up the price of oil consistently. As I discussed last night on New England Cable News (NECN), the European Union decided yesterday to keep its interest rate at 4% to fight inflation. Ours is a mere 2% so investors are selling dollars and buying Euros.

This brings us to how Washington can cut gas prices fast. All it has to do is to raise interest rates. This little move requires no Congressional approval and the oval office occupant doesn't have to sign a bill. If our Fed got serious about fighting the rampant inflation it has unleashed, it would raise the Fed funds rate, the dollar would strengthen, the price of oil would drop, and you would pay less at the pump. It's as simple as that.

If you are like me, you are probably getting pretty tired of reading bad housing news day after day, so today it is nice to bring you some good news on the housing market, as mortgage applications rose last week for the first time in three weeks.

According to the Mortgage Bankers Association, the week ended May 2 saw a 15.6% jump in the association's index of mortgage applications. The index takes into account both new purchase as well as refinance loans.

It is a good sign for the housing market, which is entering into its peak buying season. Perhaps this is the moment we have been waiting for, when buyers are finally ready to come back into the market and sweep up some heavily discounted houses. Home prices have been steadily falling for the past year, but signs are starting to point to a possible stabilizing early in 2009.

Bloomberg News reports that someone at the Fed has finally developed a bit of common sense --that is if you believe that the Fed's job is to fight inflationary expectations. Amazingly enough, the president of one of the Fed banks failed to repeat the standard mantra that "core inflation" is under control.

Instead, according to Bloomberg, Federal Reserve Bank of Kansas City President Thomas Hoenig said "serious" inflation pressures may compel the Fed to raise interest rates. He said that the current account deficit is a problem thanks to the weak dollar. And he argued that the combination of slowing growth and inflation is "troublesome." He observed that rising global commodity prices and higher prices of imported goods from China and other markets are pushing up prices.

And here's the kicker. Hoenig said, "Some would dismiss these rising inflationary pressures as temporary. I believe they are more serious." Hoenig thinks that the economic slowdown will be short-lived and that the Fed will need to raise rates quickly. He noted, "As the economy recovers and credit conditions improve, however, it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner."

Most observers believe the Fed will cut rates a quarter of a point this week and then take a "wait and see" position on the economy.

There is a very good chance that events over the last week will cause the Fed to keep interest rates just as they are.

Interruptions in oil supply have pushed the price of crude for June delivery to almost $120 a barrel. This not only means that gas prices in the US could go above $4 but the costs of petrochemicals and heating oil should continue to move up sharply.

Food prices in the first quarter went up as fast as they have at any time in the last 17 years.

The other reason that the Fed may stop cutting rates entirely is that banks are taking the savings from lower rates to build their balance sheets but are not passing those lower rates on to consumers and businesses. Much of the value of being able to borrow money for less is not being seen in the economy at all. For example, the rates for mortgages are not going down.

With inflation running at an especially high level and credit rates unlikely to get better, the reasons for the Fed cutting rates further are harder and harder to identify

Douglas A. McIntyre is an editor at 247wallst.com and writes the Ten Stocks Under $10 newsletter.

Oil prices have dropped slightly today following the weekly inventory report from the U.S. Department of Energy. Typically, the weekly inventory reports are able to move prices one way or the other, but this week we got mixed signals, and consequently, prices have not reacted too much in either direction.

Following the recent surge in oil prices, traders were looking for some concrete data to justify more price moves, but they were given a larger than expected decline in gasoline inventories, but higher than anticipated oil inventory numbers .

Analysts were expecting to see gasoline inventories drop by 2.1 million barrels, but the actual decline was 3.2 million barrels. Not good news for drivers that are already feeling the pain of record high gasoline prices. On the oil side, analysts had been looking to see inventories rise by 1.1 million barrels, and the actual increase was over twice that amount, at 2.4 million barrels.

Mortgage applications decreased last week, as an increase borrowing costs discouraged both purchase and mortgage refinancing activity, the Mortgage Bankers Association announced Wednesday.

The Mortgage Bankers Association's composite index of applications declined 14.2% on a seasonally-adjusted basis to 637.6 from last week's 734.4.

The Refinance Index decreased 20.2% to 2,286.3 from 2,866.0 the previous week and the seasonally adjusted Purchase Index decreased 6.4% to 357.3 from 381.6 one week earlier.

Rates rise

Meanwhile, the average rate for a 30-year fixed loan rose to 6.04% from 5.74% the prior week. The average rate for a 15-year fixed mortgage increased to 5.60% from 5.27%.

Defense contractor Lockheed Martin (NYSE: LMT) posted strong earnings this morning for its first quarter of $1.75 per share, well ahead of the $1.63 analysts had been expecting.

Looking at the quarter's revenue figures, we see a nice year-over-year jump, climbing to $9.98 billion from $9.28 billion. In addition, the company lifted its full-year earnings forecast by 10 cents to $7.15 to $7.35 per share.

The company had good earnings, and lifted full year estimates, so why is the stock falling in today's action? It could be in reaction to the fact that the company's biggest division, its jet business, showed a drop in sales in the period. During the quarter, this business fell since Lockheed is in the middle of a transition from its older fighter jets to newer models such as the F-35 and F-22.

Oil prices have once again hit new highs today, trading up all the way to $118.05, before cooling off slightly, and are currently sitting at $117.85.

The main concern fueling today's move is over supplies from some of the world's major oil producing countries. Nigeria is on the list, as a joint venture of Royal Dutch Shell PLC (NYSE: RDS) stated that it would be reducing its output in April and May by around 169,000 barrels a day. This comes in response to a militant attack on one its pipelines last week.

This is really nothing new to Nigeria, which over the past two years has been the victim of multiple attacks on its oil infrastructure. The country is a major supplier to the the United States, and over the past 2 years the country has seen its oil output fall by a pretty hefty 25%. All the result of militant attacks.